Electricity market outlook: European markets in 2013 - working together?
Europe will continue to work on the problem of funding and integrating renewable energy into the grid in 2013, ahead of the EU's market integration deadline of 2014. Nations are questioning the affordability of more renewable energy, particularly while demand remains depressed across the region. Conventional electricity generation continues to struggle with low margins, a pattern seen across virtually all markets, although whether flexible generation is secured at a European level or by individual nations remains to be seen. ICIS highlights key trends in the year to come.
nThe loss of capacity under the EU large combustion plant directive (LCPD) enters its first critical year in 2013, with three UK coal-fired power plants totalling 4.2GW scheduled to close in April.
British transmission system operator National Grid's latest transmission entry capacity register, published on 7 January, showed a combined 6.2GW of plants had applied to remove transmission connections effective from 1 April (see EDEM 3 May 2012). Most fall under the LCPD, while the others are closing because of poor generation economics. Capacity losses will have been priced into the forward curve, but the depth of the impact on the prompt by April could be significant.
n Details surrounding electricity market reform - along with the first all-important strike prices - will emerge throughout the year. Strike prices will determine the economic viability of low-carbon power generation assets going forwards around, as long-term feed-in tariffs with contracts for difference (FiT CfDs) will depend on these levels (see EDEM 29 November 2012).
The new system is designed to boost investment in renewables, nuclear, and further down the line, carbon capture and storage. But analysts have told ICIS that the mechanism could undermine wholesale power market liquidity because more electricity volumes will be sold via bilateral power purchase agreements.
n This year will be key to developing a robust Day-ahead price against which FiT CfDs will be settled. The UK's two power exchanges, APX-ENDEX and N2EX, will launch a single Day-ahead UK hub price under the northwest Europe market coupling project (see EDEM 28 November 2012). The intention is that a liquid Day-ahead reference price will boost trade on the forward curve, which British regulator Ofgem has long been pushing for.
GERMANY
nGermany continues to play a key role in the price coupling of the regions project to integrate Europe's power markets by 2014. The Central-Western Europe (CWE) market coupling project between the German, French and Benelux markets is testing flow-based market coupling, with a view to launching live by the end of the year, while the North West European (NWE) coupling project will integrate the CWE region with the UK and the Nordic markets by the middle of this year (see EDEM 21 November 2012).
n The country is continuing to debate the new electricity market design this year, known as the Energiewende. By summer, the government aims to have formulated the regulatory framework for the market of the future, based on wind and solar power supplemented by conventional power plants (see EDEM 2 November 2012).
The immediate concern will be to ensure conventional power capacity will be available to cover emergency demand or for balancing. The energy regulator has already marked 7.8GW of conventional power plant capacity as system-relevant, so if the plants were removed from the market they would still remain available as emergency reserve (see EDEM 13 December 2012).
However, the final market design is likely to take some years to reach, as differing interests from the renewable sector and established utilities compete.
nNet capacity growth of renewable and conventional power sources in Germany will continue in 2013, bringing increased volatility. Summer prices could feel the full impact of over 30GW of solar power capacity, installed by the end of 2012 - an increase of 7.6GW from 2011, despite cuts in subsidies.
In addition, several offshore wind farms are due to be connected, bringing the overall offshore capacity from around 200MW to nearly 1GW. This could lead to more negative prices seen during off-peak hours, as seen at the end of 2012 (see EDEM 27 December 2012), as offshore wind power generation tends to be strongest overnight. A further 5.7GW of mainly coal but also gas-fired capacity is due to come online, mostly at the end of the year.
nThe German Calendar Year 2014 is trading around its record low, and traders agree that downside should be limited, but also admitted that it was difficult to see where bullishness could come from. Some unprofitable plants will be taken off the market, but the capacity loss is unlikely to have much of a bullish impact on prices, as these plants are already priced out by renewable power sources.
Economic growth is forecast to be 0.4% year on year in 2013, implying stable demand at best. Power consumption fell 1.4% year on year to 549TWh in 2012, the AG Energiebilanzen working group estimates, despite a relatively strong performance by the German economy in 2012, when the GDP expanded 0.7% year on year, according to the economy ministry. However, some hope that political intervention into the emissions market could lift prices.
FRANCE
nFrance is also undertaking a debate on energy transition. The framework legislation is expected by the middle of 2013, setting out guidelines, followed by either decrees or laws on specific topics with decrees on implementation (see EDEM 14 January 2012).
The energy transition debate aims to create the necessary legal framework for closing EDF's 1.8GW Fessenheim nuclear plant by the end of 2016.
Other objectives include setting guidelines for ongoing renewable energy support, reducing France's dependence on nuclear generation, developing the capacity mechanism, simplifying the regulatory and legal framework for the wind power sector, and implementing EU energy policy.
nThe government plans to implement a capacity mechanism in 2015 to ensure that generation meets peak demand, with details of how the scheme will work expected mid-year (see EDEM 20 December 2012). The basic framework for the capacity mechanism, as proposed by the ministry, is that suppliers will be required to provide guarantees of adequate electricity generation as tradeable certificates, either by reducing demand from their client base or by purchasing guarantees from producers.
The capacity mechanism was criticised by the current government during the campaign last year, while some market observers were surprised that the energy ministry announced its intention to launch their national capacity scheme before the European Commission has finished its consultation on similar schemes at a European level.
nFrance's second offshore wind tender is expected to be launched in March (see EDEM 9 January 2013). The last wind tender, in which a final 2GW of capacity were made available, was criticised as reinforcing French incumbent generator EDF's hold on the market. The second tender will lead to the development of 1GW of capacity to be developed on sites off the coast of western and northern France.
Candidates will have until September to place their bids, and French energy regulator CRE will chose winning bids in January 2014.
NETHERLANDS
nIn 2013, electricity transmission capacity between the Netherlands and Belgium will increase by 20% to reach 1.7GW. The increase in the net transfer capacity (NTC), which will be split between extra daily capacity and extra intraday capacity, is designed to mitigate the risk of energy shortages in winter (see EDEM 4 December 2012).
nPlans to privatise Dutch power grid operator TenneT faced delays in 2012, with the resignation of the government over a budget crisis hindering the development of the proposals. The former Dutch government had wanted to privatise up to 49% of the state-owned grid operator to finance network improvements. The ministry of finance, as a shareholder of TenneT, and the ministry of economic affairs, agriculture and innovation, which oversees Dutch energy policy, are expected to reveal details on the progress of the plans this year (see EDEM 11 June 2012).
nWeak sparks spreads are likely to continue to undermine the build of new gas-fired generation in the Netherlands, with InterGen among the utilities to put plans for new plants "under review" following difficult market conditions (see EDEM 1 May 2012). The Dutch wholesale electricity curve has been in backwardation for most of 2012 as a result of the plant delays.
NORD POOL
nNordic electricity exchange Nord Pool Spot is planning to launch a new Elspot bidding area in Latvia from 3 June 2013 in a bid to open a new day-ahead Latvian bidding area in the Nordic/Baltic power market. Latvia was due to integrate with Nord Pool Spot Estonia Day-ahead market areas by the end of 2012 together with Lithuania, but delays in the unbundling process of the transmission system operator (TSO) pushed the deadline back to 2013 (see EDEM 16 November 2012).
NORWAY
nNorway comes one step closer to boosting its cross-border capacity with the Norwegian government expected to receive licence applications for the forthcoming 1,400MW interconnector between the UK and Norway in 2013. Grid congestion woes in parts of Norway have delayed many of the country's plans for new interconnectors, but with permit documents to be delivered this year, the TSOs are confident that commercial operations for the new interconnector will begin by 2020.
SWEDEN
n Sweden plans to phase out some of its older hydro power plants this year, in a bid to shore up prices for Nordic renewable energy certificates (elecertificates) and encourage new renewable energy capacity. The oldest hydro power plants were able to generate elecertificates from 2003 when Sweden opened the market, while Norway only joined the mechanism last year. Removal of these older plants is expected to reduce the surplus in the market by around 2m elcertificates according to one source (see sister publication ECEM 22 October 2012).
FINLAND
nIn 2013, work will begin on exporting power from Finland to Russia for 2014 (see EDEM 4 January 2013). Previously, power could only flow from Russia, but as Finland increasingly offers cheaper power with strong hydro power reserves in the Nordic market, both states have been working to make cross-border capacity available in both directions.
DENMARK
nDenmark's coalition government has agreed a long-term cross-party political agreement for its new energy strategy, and is on track to deliver on its proposals, including launching a tender for new wind farms in 2013. The government wants to generate half of the country's electricity production from wind power by 2020 and as part of this strategy, Denmark wants 500MW of offshore wind capacity to be commercially operational in coastal areas by this deadline. In 2012, the Danish Energy Agency (DEA) selected six potential offshore wind electricity sites, which will form the basis for this year's tender (see EDEM 28 November 2012).
ITALY
nLow gas-fired generation margins are expected to continue in Italy in 2013. The sector has seen its profit margins shrink in recent months, leading to the risk that up to 15GW of gas-fired electricity capacity in Italy will be mothballed in 2013 (see EDEM 26 July 2012). However, gas-fired generators' cost of gas supply fell from October 2012 onwards, said to have declined towards PSV prices from gas release prices - a state of affairs that heavily depressed spot prices in Q4.
Italy's gas system remains long at the moment on the back of low demand, and if gas demand remains low in 2013, this could push importers to further discount their prices to avoid take-or-pay penalties in their contracts. A capacity market proposal is due to be finalised this year, with responses to the public consultation on the rules due by February, although the market is not due to start in 2017 (see EDEM 29 November 2012).
nOversupply is also expected to continue this year, stemming from low demand and high renewable installed capacity. Demand plunged by 3% year on year in 2012, according to TSO Terna. High solar generation in the summer has also narrowed the baseload-peakload ratio, and this is expected to impact Q3 '13 prices. In the same period last year, gas-fired generation become profitable only in the hours between peaks and offpeak after sunset.
nItaly is testing additional spot market coupling over the next year (see EDEM 29 November 2012), but greater integration could involve changing the mechanism behind the PUN Day-ahead market to help market coupling (see EDEM 31 August 2012), although making the change could take up to two years, the regulator said.
SPAIN
nThe Spanish market has begun 2013 overshadowed by the effects of a major new tax regime in its energy sustainability law, designed to reduce Spain's tariff deficit, the debt accrued when funding for regulated-cost assets is greater than regulated incomes. There is a legal requirement to eliminate the €30bn-plus deficit by the end of this year.
Initially, prices have surged, taking many traders by surprise, and forcing them to conclude that the true cost to generators had not yet been fully factored in. Forward hedging, which in any case usually only extends only one year forward in Spain, is expected to be curtailed until the effects of the regime are known.
nNuclear was the major source of generation last year, accounting for 22.1% of the mix, according to data from Spanish electricity transmission system operator REE. But this is unlikely for 2013 - one of the side-effects of the energy sustainability law has been that the operators of the aged 500MW Santa Maria de Garoña plant have decided it would be too costly to keep the plant in operation and closed it with immediate effect in December.
nReduced support for domestic coal in Spain and/or a rise on international coal and emissions prices could deplete coal's share of the generation mix in 2013 from its 19.4% share last year, while wind is unlikely to grow much from the 18.1% share in 2012, as incentives for further investment in renewables have been drying up. 2012 was a very dry year in Spain, with the hydroelectric sector accounting for just 7.8% of the mix, but any return to historical norms in 2013 is likely to boost this share, as hydro accounted for 11.5% of the mix in 2011.
CZECH REPUBLIC
nIn 2013, Czech incumbent ČEZ is required to sell off one of its assets to comply with EU competition laws. The five power plants up for sale are all at least 800MW in size. However, some analysts have cast doubt over whether the sale will achieve its aim of breaking down the utility's dominance of the market (see EDEM 2 January 2013).
nThe Czech government published a energy policy intended to take the country to 2020 last year, but sources believe that many of the country's issues, including additional nuclear and cutting coal generation despite the encouragement of falling emissions prices needed to be resolved on an EU level (see EDEM 8 August 2012). Meanwhile, the government's plans to cut renewable subsidies has contributed to investor uncertainty and even lawsuits from those suffering financial loses (see EDEM 24 July 2012 and EDEM 20 December 2012).
POLAND
nThe Polish energy bill has been subject to several reworks over past months, and will now be published much later than originally expected. An earlier version was widely criticised for failing to provide appropriate incentives for companies to build renewable generation capacity (see EDEM 30 July 2012). The result is an uncertain future for investment in renewables, and whether any substantial new builds will enter the market.
nPoland is looking more seriously at joining regional market coupling projects, with an agreement to strengthen its grid integrity (see EDEM 4 January 2013). Grid operator PSE-Operator and Germany's 50Hz grid have now agreed a new strategy to tackle unplanned loop flows along their border, initially involving virtual phase-shifters, with a pilot scheme planned to finish at the end of March (see EDEM 2 January 2013).
nWeak fundamentals exerted pressure on the Polish curve last year, so distribution companies have benefited from sourcing on the spot market. But market participants expect this to change in 2013, with futures contracts generally lower than spot levels. With the Calendar Year 2014 Baseload shedding Zl7.00/MWh since the start of 2013, traders are bearish in their long term outlook, and expect the product to hit the lows seen with the Calendar year 2013 Baseload contract shortly.
HUNGARY
nThe start of the Day-ahead market coupling between Hungary, Slovakia and the Czech Republic has narrowed spreads between Hungary and Germany, but traders have warned that the coupling needs to be tested during extreme conditions such as the Balkan energy crisis last winter to see if it is working properly (see EDEM 22 October 2012).
Traders are still cautious over supply - in mid-January, there are no forecasts for a cold snap similar to last year's, but traders are still reluctant to discount the possibility. However, with hydro levels in the region improving traders believe that colder weather won't have such a big impact as last year.
nThe Hungarian government is aiming to expand its activity in the field of natural gas trade by signing a deal to buy German utility E.ON's Hungarian natural gas operations through state-held MVM group (see sister publication ESGM 30 November 2012). In 2013, the government should make clear if it plans to buy back privatised electricity companies to gain more control over the country's energy supply.
ROMANIA
nThe set-backs suffered by the Romanian OTC electricity market last year after an energy law amendment ruled out any OTC trading may remain a dominant theme for 2013. OPCOM is planning the launch of an OTC platform within its own framework, but participants have repeatedly raised questions regarding the reliability of such an outfit (see EDEM 15 January 2013). The European Commission is also expected to investigate and possibly intervene (see EDEM 11 December 2012)
nEnergy regulator ANRE indicated it was planning to phase out zonal transmission tariffs paid by traders to export and import electricity, between 2014 and 2019 (see EDEM 11 January 2013). The country operates a basket of fees that effectively act as an export tax and hamper the free border exchanges . However, traders interviewed by ICIS said it was unclear whether such a measure would actually be adopted even in the longer term. For now, any participants interested in buying electricity from the country will face a tariff increase of an average 12% year on year, making Romania a rather unattractive market.
nThe legal uncertainty caused by recent regulations, as well as the burdensome taxes levied on companies active in Romania, could dent the attractiveness of the country's investment climate, despite the increase in its wind generation with attractive subsidies (see EDEM 25 June 2012). Romania's 540MW Fantanele-Cogealac wind farm became the largest onshore farm in Europe in October, according to its operator ČEZ (see EDEM 11 October 2012).
BULGARIA
nBulgaria is expected to finally implement the EU's third energy package in June by officially unbundling the transmission system operator ESO from state-owned utility NEK (see EDEM 2 January 2013). In November, Bulgarian Energy Holding (BEH) confirmed that the project is in its final stages, and Bulgaria's energy regulator DKER has started the procedure to certify ESO as an independent system operator.
nThe country's balancing market is also set to fully start operations this year. The balancing market is the precondition for the start of the long-awaited Day-ahead exchange, although there is no deadline for the latter yet (see EDEM 20 July 2012). Bulgarian traders have previously reported that some coordinators of balancing groups are active already.
nAt the end of January, Bulgaria will hold a referendum to show if the country supports the 2GW Belene nuclear power plant project (see EDEM 2 October 2012). But it remains unclear if the government will take the referendum results into account, as officially the project has been scrapped for good (see EDEM 27 March 2012).
TURKEY
nTurkey is expected to launch the cross-commodity exchange EPIAŞ this year. The project is part of comprehensive amendments to the electricity market law being discussed by the energy commission in the Turkish parliament (see EDEM 20 December 2012). These amendments refer to the prospective ownership of the proposed energy exchange EPIAŞ, incentives for newly commissioned power plants, and the future of transitional contracts held by the electricity incumbent EÜAŞ. The exchange could be set up within the next six months.
nAnother important development for the market is the release of anything between 5-15TWh from the balancing portfolio of the incumbent EÜAŞ (see EDEM 5 December 2012). These volumes are expected to be sold to all participants under closed auctions and should improve liquidity. The state generator was expected to release all its generation currently tied up under long-term contracts with the state wholesaler TETAŞ and distribution company TEDAŞ. However, EÜAŞ decided at the end of last year to maintain the status quo, given the nature of market which remains heavily subsidised.
nAdditional volumes should be released to the market from a number of sources. Firstly, a total of just over 3GW of gas-fired private capacity is due to be switched on later this spring.
Secondly, cross-border flows with Bulgaria and Greece are set to increase as Turkey completes its tests with the European synchronous zone (see EDEM 16 November 2012). Turkey imports 400MW from Bulgaria and Greece on a monthly basis, but the volumes are likely to be cranked up in September if the European Network of Transmission System Operators for Electricity (ENTSO-E) approves. Turkey has been testing its interconnection with the EU grid since September 2011.
Similarly, Turkish market participants also anticipate the start of cross-border flows with Georgia in the first half of 2013. A total of 350MW were expected to come online by August 2012, but the interconnection is yet to be completed. The Georgian-Turkish capacity was expected to be increased to as much as 700MW by this summer.
EU
nWork on the EU's third energy package continues this year. Six electricity network codes out of nine are expected to be entering the comitology process or already finalised by the end of 2013. Meanwhile, the Commission is expected to give to the European network of transmission system operators for electricity (ENTSO-E) the mandate to start drafting the HVDC and the electricity balancing network codes, which will be the last to be finalised at the end of 2014, together with the forward capacity allocation network code.
nIn February the European Parliament is expected to vote in favour of a regulation to reduce the time taken to grant permits to construct cross-border gas and electricity infrastructure. The regulation aims to tighten procedures and boost private infrastructure investments, prioritising 12 strategic trans-European energy corridors and areas, and providing criteria to identify projects of common interest necessary to implement them. The first list of projects of common interests (PCIs) is expected to be ready by mid-2013, and made public by the end of 2013. New infrastructure is seen as the main way to help manage unplanned flows in Europe (see EDEM 29 November 2012).
nEnergy companies face widespread changes with increased transparency regulation coming into effect over this year. The Regulation for Energy Market Integrity and Transparency (REMIT) requires energy companies to publish information that could affect energy prices (see EDEM 17 September 2012).
Other legislation aimed at curbing risk in European energy trading is also taking shape over this year, including the Markets in Financial Instruments Directive (MiFID II), which could come into effect by 2014 (see EDEM 26 October 2012), and its correlated regulation, the Market Abuse Directive.
COAL
nThe international coal market will remain oversupplied in 2013, which will likely keep prices bearish. The Atlantic basin will be well supplied, with strong exports from Colombia expected to make up the forecast reduced production in the US this year.
nThe large combustion plant directive is also set to start kicking in across Europe. The closures of three coal-fired plants, with a combined capacity of 4.15GW, expected during 2013 in the UK is set to reduce demand from the country for international coal in 2013. Given the UK is the second-largest consumer of international coal in Europe after Germany, this is another bearish factor on the horizon.
nPrices for US-produced coal are reportedly starting to attract the interest of Indian buyers, but their bids are still several US dollars per tonne below offers, and so potential buyers from the subcontinent are unlikely to affect short-term coal in the European DES ARA market. Any uptick on Chinese imports for international coal will depends on international coal prices to compete with the country's domestic production.
CARBON
nExpectations for carbon prices in 2013 are bearish as the permits oversupply is set to continue. The EUA benchmark contract shed 26% of its value over the course of 2012, and the only event expected to support prices is the back-loading proposal, which suggests holding back 900m EUAs in phase III (2013-2020) of the EU ETS 400m in 2013, 300m in 2014 and 200m in 2015, with 300m EUAs reloaded in 2019 and 600m in 2020 (see sister publication EDCM 14 November 2012).
However, consensus among European member states is still lacking. Poland has declared against the proposal, while key member Germany is still undecided. Analysts said that as the back-loading may not start earlier than Q4 or even later, 2013 could "at best, be a groundhog year for European carbon" even if the proposal is approved. If the proposal fails, prices are expected to plunge further. ICIS staff
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