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New PGE unit is not sole reason for Polish spot electricity price decline – analysts

29 Aug 2012 18:43:14 | edem

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The average electricity spot price in Poland has decreased by almost 10% since last year, Tauron's president and CEO Dariusz Lubera said during the company's half-year results conference last week, adding that PGE's new Belchatow unit has influenced the market significantly.

"The new Belchatow unit has come online and created instability. Last year was more stable," Lubera said. "There is a surplus of generation - this is a situation that is determined by PGE."

Polish utility PGE's 858MW Belchatow B4-14 unit has been the country's largest conventional power plant since its activation in September 2011 (see EDEM 4 August 2012).

Tauron forecasts the average spot price for 2012 as zlotych (Zl) 179.52/MWh (€43.23/MWh), down from an average of Zl199.08/MWh in 2011.

The declining spot price is also affecting long-term contracts, as more expensive plants are being squeezed out of the market. Tauron said its power generation in the second quarter dropped by 20% year on year as a result (see EDEM 23 August 2012).

However, market participants also see other factors at work - rather than just one utility affecting the market.

"[Lubera's] comment is not totally wrong, nor totally right," one market analyst - who wished to remain anonymous - told ICIS. "The new block at Belchatow is lignite-fired and therefore at the lower end of the curve, bringing down the marginal cost of the whole curve. [But] declines in demand and increases in renewables are also factors, as is flow from Germany. The interconnections from Germany to Poland are not large, but it is still a factor.

"The Belchatow unit definitely had an impact," added one Polish trader. "[But] a bigger impact is the eurozone crisis, causing lower consumption. Also, the increases in renewables are having an effect."

Another analyst argued that the effect of the Belchatow unit was not anticipated by the market.

"It was pretty surprising that one new block can distort the market," he added. "There are a few reasons for declining spot prices, [and] Belchatow is one of them. Probably the most important driver is that demand is softer than expected."

Traders and analysts also pointed to increased imports from Sweden and declining spot prices throughout the rest of the EU as major factors.

"Lower German prices are also a driver - spreads are much lower than last year," said a second trader. "People are not pushing prices on fixings that are high enough to export to Germany, the Czech Republic or Slovakia as they did last year."

Impact on the curve

Market participants agreed that these factors - including increased capacity - would also have bearish influences on the curve.

"Tauron is a large distributor to retail clients. Loses on the spot were partially compensated by selling to these clients, which is regulated at a fixed price," noted a third analyst. "In the long run, however, there is not much you can do if the prices are weak."

The average closing price of the Calendar Year 2013 Baseload contract for sessions in January 2012 was assessed by ICIS at Zl213.85/MWh, yet this figure had declined to an average of Zl199.79/MWh over July.

"That's a 10% drop in a short time," observed a fourth analyst. "There are a few drivers, including declining carbon prices, but installed capacity is another main reason."

The EU ruled in July that Poland's power generation sector would receive 77.8m emissions allowances for next year, although some plants were ruled out of receiving these (see sister publication EDCM 13 July 2012 and EDEM 24 July 2012).

"Carbon prices are so low - this is a huge factor. We are waiting for the EU's decision on the allocations," added another analyst. "The free allocations will be reduced next year, and I do not believe that this extra cost is priced in."

Capacity uncertain

All of the Polish utilities have been asked to invest in new plants in preparation for older plants coming offline, and they aim to be ready with new capacity. However, questions remain over which projects will be delayed.

"Over the next couple of years the market will tighten. No large plants are being built right now, but there are plans," a sixth analyst noted. "I'm not 100% sure construction of these blocks will kick off next year."

Others agreed that the future shape of the power plant fleet is not fully developed. Some projects have been delayed, but this is quite typical of the region because construction is long and complicated.

These plans have also coincided with dramatic events affecting construction companies. For instance, PBG - Poland's third-largest construction company - was declared bankrupt in June. Another major player, Polimex, is to receive state aid help settle its debts.

"These companies are in dire straits because of poor management and are paying the price for miscalculated costs," another analyst said, adding that these events have affected investor confidence in large construction projects.

"However, more efficient and low-cost production will eventually come on-stream, so there a good chance the spot will weaken even more," he added. KM

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