Italian spark spreads face swathe of bearish drivers
Energy traders in Italy expect profit margins for gas-fired power plants to deteriorate in 2013, despite them having declined year on year in 2012.
There is little chance of a long-term technical reversal, traders said, pointing to waning demand, bearish macroeconomics, oversupply of gas and fierce competition among Italian combined-cycle gas turbine (CCGT) operators.
Spark spreads measure the financial margin between the price of electricity and the cost of buying gas to generate the power. Clean spark spreads also take into account the cost of carbon, and are therefore a measure of profit margins for gas-fired plants.
In the period between January and December 2012, Italian spark- and clean-spark spreads traced a predominantly downward path. On 27 December, the front season was calculated at €15.05/MWh, down from an €18.39/MWh front season close at the start of the year.
According to sources active on the Italian market, a major bearish driver for forward spark- and clean-spark spreads in Italy is the reduction of electricity demand, on the back of the economic slow down.
Electricity demand in Italy over the first 10 months of 2012 was down by 2.4% year on year, a utilities analyst at a major bank said. "This had a bearish effect on clean spark spreads, and if the economy does not improve in 2013, clean sparks might shed even more ground," he said.
One power trader said: "Gas oversupply is the main reason for the decline. Some gas plants with oil-linked supply contracts are no longer profitable.
"This situation may improve once some generators, maybe the smaller ones that are less flexible, drop out of the market."
High competition among Italian CCGT plants was cited by traders as a bearish factor behind the decrease of spark spreads.
In addition, higher amounts of renewable generation in the system have made gas plants less profitable, adding to the swathe of bearish drivers.
"Combined cycle [gas] plants are more efficient and consume less fuel. This increases competition among generators, reducing their margins," a trader said.
In Italy, gas supply contracts are increasingly linked to the spot market, as opposed to more traditional oil-linked long-term supply deals.
Oil-linked supply contracts for gas-fired generators have been renegotiated by a number of Italian companies in recent months, allowing them to secure fuel for less than the original oil-indexed price would have been (see ESGM 31 July 2012).
This has, in turn, exerted downward pressure on wholesale electricity prices, which has pulled down clean spark spreads despite the fall in the gas supply cost.
Going forwards, a downward trend in electricity prices looks set to pressure spark spreads into 2013 and even beyond, according to one source, who cited the phasing out of green certificates (see EDEM 23 November 2012) as another bearish driver for the power market.
"The disappearance of green certificates and lower gas prices has had a bearish impact on Italian wholesale electricity prices and will cause another €3.00-4.00/MWh discount on Italian prices by 2015," said the bank-based utilities analyst.
"Energy prices now reflect now the physical market rather than the oil price," one trader said.
Another trader said that cheaper gas contracts did not reduce generators' costs by a great deal, but they did go some way to cushioning losses on Italian spark spreads.
"Generation costs are still very high and in the fourth quarter profit margins for generators were really low or negative in some cases.
"And they will fall further in 2013 because carbon won't be free anymore, which will add pressure to [clean] spark spreads," he said. MM
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