Solar production and strong hydropower reserves look set to further squeeze already thin slots during which Italian gas-fired power plants can run economically and turn a profit this summer, according to traders.
Downward pressure on electricity prices from hydropower production is expected, particularly during June and July, with solar generation then traditionally peaking in August.
As a result, the number of hours that Italy exports electricity to neighbouring countries over the summer months could rise, although traders said it is too early to anticipate any net export periods.
During summer months, with electricity prices during the day depressed by strong photovoltaic (PV) generation, gas-fired power plants try to profit during hours when demand is relatively high but solar generation is weak, which often restricts economic running times to within two slim windows: 8:00-9:00 and 20:00-22:00.
“Plants could work for about ten hours peak time with a negative spark [profit margin], so in the hours with higher load, they try to place higher offers to compensate for low returns during the day,” one plant operator said.
“During the day, no one goes in [runs capacity] because the plants are not economic during those hours, but they can make a profit between 8:00-9:00 and 20:00-22:00, so people try to push up prices [in those hours].
“Therefore, the impact of photovoltaic on prices is almost neutral,” the operator claimed.
However that strategy may be compromised by a shift on the hydropower outlook coming into summer.
Market participants said higher hydropower reserves this year – the result of milder temperatures which have melted more snow on the mountains than would normally be the case – might depress prices further during hours with higher demand, such as in the evening, which is when thermal operators would hope to begin cashing in.
But the influence of this is likely to have diminished prior to August, according to one market analyst.
“There is a lot of hydro capacity that hasn’t been used yet. It could be a bearish factor during June and half of July,” he said, adding that the demand load will be a factor.“A lot will depend on how much hydro operators decide to use this summer and also how much rain falls in coming weeks,” he added.
Despite expected lower prices during the summer months, traders said the forecast for export volumes to neighbouring countries remained uncertain:
“It is still too early to talk about Italian [net] exports, as we would need hours below €30.00/MWh during the summer months. Not even coal is profitable at that price,” one trader said, in reference to relatively high profit margins for coal-fired power plants, or dark spreads, as a result of a long-standing global coal supply glut.
Italian traders said they expect photovoltaic generation to pressure electricity prices during peak hours, with around 5GW of additional PV generation compared with today, on sunny days.
According to latest figures from market operator GSE, Italy had 17.7GW of solar capacity in place.
Intraday figures provided by Eurowind, solar generated around 2.8TWh in August last year, with a load factor of 22%.This was up from 2.1TWh the previous April, with a load factor of 17%, a 33% volume increase.
Latest figures show Italian solar capacity generated around 2.3TWh in April this year. A similar 33% increase from April to August would equate to 3.1TWh of production in August .
This will result in a reduction of Italian electricity peak prices to the extent that they could fall below their baseload equivalents during the summer months, especially in August.
“We could have several hours on the peaks with net export from Italy [towards France and Switzerland],” one analyst pointed out. This has already occurred this year, as recently as March ( see EDEM 14 March 2014 ).
According to one trader: “Peak prices might remain €3-3.5/MWh higher than their baseload equivalents in June and July while in August peaks could be almost flat to the base, because during the Ferragosto bank holiday peaks could go below the base.
A second trader commented: “If the situation does not change, I expect renewables to have a similar [bearish] impact to last year during the summer months.”
“I keep a bearish view on Q3 [‘14]. The product could lose another €1.00/MWh,” one trader said on Wednesday, when summer months and Q3’13 shed over €1.00/MWh day on day.
On Friday, a trading source pointed out that if operators use hydro reserves in May, this might be bullish for June and July or vice versa. He also said Q3 ‘14 has been losing ground in recent sessions, so it may correct its movement at the start of the week ahead.
Market participants said that PSV natural gas movements and electricity demand during the summer months will be, together with renewables, key drivers for power prices over the summer. Matilde Mereghetti