Analysis: Czech liquidity down on lack of hedging forward volumes

A sharp increase in traded volumes of electricity on the Czech market during the final quarter 2014 has tailed off, with market participants saying producers are scaling down forward sales in hope of higher prices later in the year.

Traded volumes in 2014 were up by 49% from the previous year, but have now seen a drop, with volumes in February 2015 registering a fall of almost 32% year on year and 11% month on month.

Market participants said the rise in liquidity during 2014 had been driven by an increase in forward hedging in the final quarter of the year, as generators sought to lock in costs while regional prices fell steadily.

Forward hedging

Partially state-owned energy incumbent CEZ owns the majority of Czech production, with around 77% of the country’s generation capacity.

The company’s 2014 financial results showed that as of November 2014 the utility had hedged 85% of 2015 production and 62% of 2016 production.

One analyst said these figures were actually quite conservative – CEZ had hedged almost the same percentage of front year volumes during 2013. “Utilities don’t change hedging patterns in general,” she added.

However, another analyst pointed out that although CEZ’s 2014 results showed it had hedged almost the same percentage of front year volumes as during the previous year, the company was expecting more production during 2015.

“When you look at the outlook for production, [CEZ] expects more production this year – [660MW] power plant Ledvice is finally approaching its commissioning date,” he explained.

A broker said that late trading had also caused an uptick of liquidity during the final quarter, saying that low prices had caused a lot of traders to postpone closing positions on the Calendar Year 2015 contract until Q4, in the hope that prices might pick up.

“Producers waited to get some extra money for their not-hedged production, but I believe most of it had already been hedged,” he added.

Market participants said that February’s drop in liquidity was partially caused by a tailing off of the effect of increased forward hedging in the previous quarter, as producers hold off hedging production in the hope that prices might pick up later in the year.

“A lot of utilities’ hedging is generally slowing down,” commented one analyst. “In general the utilities see the market as close to the bottom – they are hedging later in the year in the hope that prices will pick up,” he added.

Outlook

Potential reforms to the carbon market were also cited by market participants as a possible reason for lower liquidity in the early part of the year. The Czech Republic’s reliance on low-efficiency fossil fuels like coal means an earlier start to the market stability reserve proposed by the EU could have raise prices, prompting increased trading activity.

Coal-fired power plants account for nearly 70% of partially state-owned incumbent CEZ’s installed capacity, with most coal-fired plants burning lignite or brown coal, a less efficient form of the fuel than black coal.

A majority of EU countries want the market stability reserve to begin in 2017, but a smaller group of nations want the reserve to start in 2021, the original date proposed by the European Commission. EU countries are next scheduled to discuss the reserve on 25 March. Ellie Chambers