Italy emerges as driver of Hungarian day-ahead power prices

Stronger exchanges of electricity between Italy and the Balkan region have paved the way for a closer correlation between the markets of Hungary and Italy, figures show.

Day-ahead power prices on exchange HUPX showed signs of moving in tandem with their Italian and Slovenian equivalents in the second half of 2015 (see graph).

And the trend is likely to continue, according to traders.

The emerging link

The Hungarian power exchange HUPX is known for strong volatility as the country has an electricity deficiency. A net importer and the most expensive market in centraleast Europe, Hungarian power prices are sensitive to changes in demand and supply, and especially to shifts in electricity flows.

Meanwhile the Italian power market has been coupled with neighbouring Slovenia on a day-ahead basis since 2011. Cheaper electricity from Slovenia generally flows into Italy.

But a weakening trend in the Italian market throughout 2015, driven by the collapse of the Brent crude price, has narrowed the spread between the two countries.

In some sessions and some hours, flows have reversed with Italy flowing electricity into Slovenia. Data from Italian exchange GME and Slovenia’s SouthPool shows that in 2015 the spread tightened and Slovenia out-turned above Italy seven times.

Generally, the Hungarian day-ahead market has taken its lead from neighbouring Romania and, in some sessions, the more liquid Germany.

But as the spread between the Italian and Slovenian spot markets has narrowed and the correlation between the two markets has grown stronger, the price link has filtered into Hungary.

The correlation coefficient, a measure of the strength of the relationship between two variables, was 0.54 for the Hungarian and Italian electricity day-ahead exchanges in H1 ‘15, compared with 0.62 for the equivalent in H2 ’15 (see map).

 The correlation coefficient can have any value between -1 and +1. Values closer to +1 imply the two variables are moving in line, while figures near -1 show they are linked but move in opposing directions.

The tighter link is however limited to cases where the system is fairly stable, without supply shortages amid outages, or extremely high consumption.

Driver

As a result market participants have now started to look at the Italian price more often and more closely when trading the Hungarian spot market.

This is despite the lack of a physical connection between Slovenia and Hungary. Electricity from Slovenia into Hungary can be transferred through either Austria or Croatia.

Hungarian electricity grid operator MAVIR and Slovenia’s ELES have signed a contract for a 1GW transmission line between the two countries, but this is not scheduled to begin commissioning until the end of 2018 (see EDEM 10 November 2015).

Even so, traders said the correlation is likely to strengthen further, but this will be limited to sessions without extreme drivers pulling the market in different directions.

For example, as the sensitive Hungarian HUPX reacts strongly to outages and low temperatures, events in the Balkan region are unlikely to move Italian prices. This is because the physical cross-border flow between Italy and Slovenia is too small and can be offset by Italy’s links with other countries such as France or Switzerland.

“It [the Italian spot] is the highest cap on prices in the region,” said a trader. “I don’t know why we should even check German prices [as a driver],” he added.

A second source said the impact from Italy could in fact outweigh the German one.

Greece

Further adding to the connection, Italy is also linked to Greece through a 500MW link. A profitable spread usually takes Italian flows into Greece. This also ties Italy to the Balkan region as Greece either imports Romanian and Bulgarian electricity, or in cases of lower prices, exports into the Balkans through Macedonia.

Traders were however torn over whether or not the impact from Italy extended further than the spot market.

One regional trader went as far as saying the trend had replicated itself on front month products. “Even when looking at the development of February ‘16 [in January], you can see it is pure correlation,” he said. sophie.udubasceanu@icis.com