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French electricity market may see ‘fireworks’ as UK carbon tax kicks in

28 Mar 2012 17:23:51 | edem

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The UK's looming carbon tax for electricity generators will lead to greater power imports as the economics of coal-fired generation come under heavy pressure, power traders told ICIS this week.

But some market participants insisted that continental traders have not adequately priced the potential loss of volume via the French and Netherlands interconnectors into continental power contracts. "In winter of 2013, there will be fireworks in France," one source said.

Some traders are anticipating price spikes, particularly in France, during the 2013/14 winter.

"France and the Netherlands will definitely export fully to the UK from April next year," one trader claimed. "You need strong cooperation between continental and UK power traders.

"There are people out there who do that, but I am not sure how many continental power traders are aware of the UK tax and the likely decommissioning," he added.

The UK is set to lose 8.7GW of coal-fired power generation capacity, as well as 3GW of oil-fired peaking plant by the end of 2015 at the latest, under the EU large combustion plant directive (LCPD).

And the looming carbon price floor, which takes effect from April next year, coupled with healthy dark spreads, has seen coal-fired generators rampantly eat into their remaining running hours (see EDEM 12 March 2012).

Under the LCPD, polluting power stations commissioned before 1987 - coal and oil plants in the UK - are defined as "existing plants". Such plants can either comply with the LCPD by installing emission abatement equipment, or opt out of the directive.

Opted-out plants can operate for a maximum of 20,000 hours from 2008, which was when the legislation came into effect, or the end of 2015 - whichever comes first.

Power futures contracts covering the first winter after the carbon tax is expected to take effect rose considerably on both the UK and French markets after it was announced last March, with the gain more pronounced in the UK (see graph).

Merit order

The impact of the loss of production in the UK, and the resulting tightness in the UK and French power systems, might be aggravated by decommissioning of coal-fired power plants in France, which is exposed to a sensitive merit order curve because of its reliance on nuclear power.

In June last year, E.ON hinted that it would have to shut five older coal-fired power plants with a combined capacity of 1.1GW in France.

While stopping short of saying the plants would definitely close their doors, E.ON said: "The combination of regulatory, technical and economic constraints prevents the company from continuing to operate five coal-fired power plants, without major damage to the company's business as of 2013."

According to one French power trader, peaks prices in the fourth quarter of 2013 could "easily" climb into a €80-90/MWh range before any exports are taken into account.

If you then take 3GW out of France because of exports some hours could push up into a €120-130/MWh range. "And if you then get a cold snap, I am not saying we will get a repeat of week six this year, but we will get very close," the trader added.

In week 6 this year, the French spot rocketed to levels unseen for over a decade as cold weather combined with a dip in hydro and wind generation (see EDEM 8 February 2012).

New plant

Opinion in the market was divided about the exposure of the system to a repeat of the violent price spikes as a result of UK decommissioning.

The sustainability of the tax as a policy instrument was also questioned by one UK-based trader. "Is it what the government really wants to do?" one asked. "It's a tax - it can be pulled at any time."

One mainland Europe trader added: "France usually exports power to the UK anyway. The decommissioning will not make such a big difference."

And another factor could go some way to offsetting any impending UK-France supply crunch.

About 2.2GW is expected to come on line this year in the Netherlands, with an additional 4.9GW to follow over the next five years (see EDEM 228 March 2011).

In addition, the UK is set for a considerable net capacity increase of 5.2GW in 2012 (see EDEM 12 January 2012).

But one French trader said a post-2013 crunch is still inevitable. "Overcapacity is the old story; we traded that in 2010 and 2011," he said.

"What's coming now is Cal '13 with the influence of carbon. People have focused too much on new-builds and forgotten about decommissioning. The carbon tax will radically change flows," he added. MD/JS

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