UK traders take £1m hit on back of IFA electricity cable woes
Some UK power trading desks have lost in excess of £1m (€1.2m) as a result of technical problems that have plagued the 2GW UK-France electricity interconnector since September, ICIS has learned.
And calls are growing for compensation from participants angered by what they label a "disappointing" lack of information regarding forward capacity availability. "We have lost a load over this. We're talking seven figures," one prompt trader said on Wednesday.
Capacity availability on the IFA cable, as it is known, has been choppy for some time. The full 2GW has been available for only 24 days since 3 September last year, according to the schedule published by transmission system operators (TSOs) National Grid and French counterpart RTE, which jointly run the link.
The issue first came to the fore in late October, when French Day-ahead prices spiked on the back of a cold snap. "We were facing rocketing prices in France, and the UK was going up, but it wasn't going up anything like it should," one trader said.
On 26 October, ICIS closed French Day-ahead Baseload at €90.00/MWh, its highest level since the preceding February and a €21.56/MWh premium to the UK contract.
The problem for traders with an IFA stake intensified as French prices spiked. "You can get hit quickly off that," one source said. "With prices shooting up it doesn't take a lot for you to get stung."
A second trader told ICIS in December the market was staring at "massive arbitrage opportunities" and yet "we keep on getting capacity reduced. We could be looking at hundreds of thousands of pounds profit, yet they're looking at shutting down [capacity on] the cable every few days (see EDEM 20 December 2012)."
A National Grid spokesman said the original fault arose in late September on the UK side, which cut capacity by 500MW. After this, problems became apparent in France, which reduced capability by a further 500MW.
"Interconnector users were given the background to the issues on 15 November, along with regular updates when the capacity changed either up or down," the spokesman said. RTE failed to comment.
According to one source, there has been reluctance to discuss compensation for the heavy hits because trading desks willingly hedged IFA capacity. "But obviously everyone has to do that - if they didn't it'd be crazy," the trader said.
Because the hedging positions were adopted willingly, there has been little appetite to discuss financial compensation, despite the fact that people are "more than angry. Some have got completely burnt," one trading-house based participant said.
National Grid countered that if capacity bought has to be curtailed, then the money paid is refunded in accordance with IFA access rules.
"Users buy capacity in the auctions, and it is available for them to decide to use, or not use, close to real time," the TSO's spokesman said.
Despite ongoing repair work, going into the second half of the winter and at least until February, problems are persisting. National Grid and RTE have scheduled 1GW IFA availability until 16 January, 1.5GW from 17-31 January, with 2GW until early June when the next planned outage is set.
But given the chronic nature of the technical issues, trading desks say they are reluctant to hedge capacity for February despite the schedule.
"Over the next few weeks the French market is really quite high with some cold weather," one trader said. ICIS last assessed French Week-ahead Baseload at €69.25/MWh on Wednesday, the third-highest front-week close of the winter to date.
"If I've got capacity then I want to hedge that now, but I'm not confident that I'm going to be getting another 'X' number of megawatts for those weeks," the trader said. "So if I hedge now, then I risk getting stuck, and if I'm not able to flow and prices change - I'm in trouble."
The problem, traders said, centred on the availability of forward information, as opposed to the curtailments. "We'd like additional capacity, but what we'd really like, is forward stability," one participant, who described his company as a "big player" on the IFA cable, explained.
National Grid stressed it had made every effort to notify the market of forward IFA availability. "There have been regular communications with users, giving as much advance notice as possible. However this is complex technical equipment and repair times can sometimes be difficult to predict," the company's spokesman said.
The timing of the issue is not good for the European Commission, which is pushing to impose a single electricity market, with integration of an intra-day market by 2014 (see EDEM 26 March 2012).
Fully functional interconnection, with adequate capacity to minimise price differentiation, is an integral part of the infrastructure required for market coupling to become a reality.
From early December to early January, UK Day-ahead prices generally carried a premium over those in France, despite the IFA cable running for the vast majority of time at full available capacity (see graphs), indicating that more capacity would have been snapped up.
Various firms hold a physical stake in IFA flows at any given time. A number of long-term auctions were held for 2013 capacity, the most subscribed of which saw seven capacity holders emerge from 13 entrants.
Capacity is also auctioned on a day-ahead and intra-day basis. On Thursday the daily auction saw up to seven capacity holders from up to ten subscribers, with two of six participants purchasing intra-day capacity. JS
Other Related Stories