German solar capacity rise pressures electricity prices
Increased solar power production in Germany has combined with weaker demand year on year to pressure German electricity prices, particularly in Peakload hours.
ICIS German Day-ahead Peakload indices for working days have averaged €52.84/MWh up to 31 July this year, compared with €62.14/MWh between 17 January - when ICIS launched the indices - and 31 July last year.
This year, the Peakload:Baseload ratio in Germany has been higher than last year, but participants put this down to low margins on other forms of generation.
Participants suggest that the decline of German prices is directly linked to the increase of solar power in the grid this year. In fact, Peaks prices for working days have out-turned below Baseload on three occasions this year, according to ICIS data (see graph). The move comes despite support for the spot market from low wind production levels in Q2 '12 and Q3 '12 to date.
German solar production has increased by 2TWh, comparing February-June last year to the same period in 2012, according to spotrenewables data from Eurowind, first published by ICIS in February 2011.
Installed solar capacity in Germany stood at 24.5GW in May, according to data from European power exchange EEX, up from 18.4GW at the end of May the previous year (see EDEM 5 July 2011).
Weather conditions have also prevented solar panels from producing at maximum level. According to meteorologists Weather Services International, temperatures in most of central Europe stood at around 2e_SDgrC below average for most of April and into the first half of May.
However, a heatwave from the end of May until the end of June saw temperatures in central Europe rise to 6e_SDgrC above the seasonal average and boosted solar power generation.
According to data from German energy lobby group BDEW, production from solar power plants made up for 5.3% of Germany's total electricity production in the first half of 2012 (see EDEM 26 July 2012).
Some Peaks support this year...
Despite additional solar capacity in peak hours, contrary to expectations, the indices' Peakload:Baseload ratio in Germany has averaged 1:1.125 to the end of July this year, compared with 1.112 for the same period last year.
Traders put this down to ongoing poor generation margins. With low margins on gas-fired generation, high gas prices have helped to boost the Peak. "Gas prices are still high," said one source. "As soon as Japan turns down the LNG imports, the gas price will come off and bring Peak prices down but not the sparks, necessarily. That has an effect on the Baseload price and therefore on the dark spread."
In fact, low margins have also been blamed for poor French nuclear availability this year. "We have already seen this year that France is not keen to keep nuclear plants running at such low prices," another source said.
The delays in returning nuclear units to the grid boosted French spot prices above the German level for much of the second quarter (see EDEM 6 July 2012), and French nuclear operator EDF warned that the additional outages would bring down its full-year production by at least 5TWh to 415TWh (see EDEM 31 July 2012).
...less support next year
Solar capacity gains have left German market participants wondering if spot prices during Q2 '13 and Q3 '13 could go even lower if next year's summer quarters see more hours of sunshine.
Furthermore, some sources have speculated that the German government's plan to cap solar subsidies at 52GW will lead to a rush of developers trying to install as much photovoltaic capacity as possible over coming years (see EDEM 28 June 2012). Any surge of capacity would depress spot values further during a period of high solar intensity.
"I don't think that we will see the spot price fall below the lignite production marginals," one market participant said. He estimated the breakeven margin price for German lignite-fired power plants at around €25.00/MWh.
Another source believed that the power prices during some hours could dip into negative territory.
However, further support could come from France, a third participant said: "It is possible that France would keep a chunk of units offline next year and, if prices fall too low, import from Germany during the Peakload hours."
There is not much upside to German electricity spot prices, even with stronger demand as the macroeconomic situation improves and other commodities gain ground.
"I don't think the spot prices would fall to lignite margin levels, however," he said, seeing spot prices around coal-fired generation break even levels at €39.00-40.00/MWh as more likely. "This also makes me wonder why the Calendar Year 2013 Baseload contract has stuck around €48.00/MWh for so long."
Yet the increase in solar production undermining Peakload power prices, coupled with strong gas values, has depleted spot and curve German spark spreads, making gas-fired power generation unsustainable. Market participants put the break-even price for gas-fired electricity generation significantly higher, at around €50.00/MWh.
The break-even price for new gas-fired plants could be higher still, at around €55.00/MWh, as these would have to incorporate the cost of capital expenditure, despite higher efficiency. "There is no doubt that the CCGTs will get priced out next year," one German source said. Peakload prices for German power on the spot have averaged €49.88/MWh since the beginning of Q2 '12, €10.00/MWh below the break-even level of new gas-fired power plants. SR/ZD
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