Market split on Hungary’s Q2 power premium to Germany

Market opinion is split over whether the Hungarian electricity front quarter premium to the German equivalent should decrease.

Hungarian forward contracts often stand at a wide premium to the German counterpart products as Hungary has relatively little domestic production and is reliant on electricity imports.

The spread between products in the two countries is also traded frequently, as cheaper power is bought in Germany and exported to Hungary. A wider premium could increase opportunities to trade this spread.

According to ICIS assessments, at the close on 1 March, the Hungarian Q2 ’16 Baseload contract stood at a €5.1/MWh premium to the German counterpart product.

This is substantially lower than the €7.6/MWh premium on the front quarter recorded at the same time last year.

But the spread has since widened during a few bullish sessions as the Hungarian product has risen faster than the German equivalent.

Increased hydropower

A bearish Hungarian Q2 ‘16 stemmed from above-average run-of-river production in the neighbouring Balkans from mid February.

Danube river flows entering Romania through the Bazias point are predicted to reach 12,000 cubic metres per second (cbm/s) by 13 March, according to the Romanian National Institute for Hydrology. The average for March is 6,700cbm/s.

The Bazias point feeds into the Iron Gate hydropower complex, representing 1.33GW installed capacity in Serbia and 1.39GW in Romania.

But higher river flows have so far failed to replenish reservoir stocks, which could provide much needed supply during summer months.

Reservoirs measured on 6 March by Transelectrica were 40% full, much lower than during the same weeks in 2014 and 2015.

“The market is confused,” said one trader. “We have a lack of hydro on the long term and an excess of water in the short term.”

Some market participants were concerned that snowfall was lower this year, meaning that run-of-river generation will drop unless there is fresh precipitation.

“The risk is that the rain doesn’t continue and it gets more hot and dry – people are assessing that into the price,” said one trader

Maintenances

Plant maintenance in the Balkans and Hungary will also impact the Hungarian Q2 premium to Germany.

500MW of capacity at Hungary’s Paks nuclear power plant will be offline for maintenance from 20 May to 18 June.

One 706MW Cernavoda nuclear unit in Romania will also have longer than usual planned maintenance from 7 May-28 June, though some traders said this would be offset by Slovenian nuclear plant Krsko. It is not thought Krsko maintenance will coincide with Paks and Cernavoda this year.

But one trader pointed out that with current hydropower production, the Paks and Cernavoda capacity would hardly be missed.

“In the current situation the 500MW Paks outage would not even be noticed, but if water dropped to levels seen at beginning of February it could have a huge effect.”

Looking ahead

Market participants who thought the premium of Hungary was overvalued pointed to the spread between day-ahead prices.

The over-the-counter day-ahead in Hungary has actually turned out at a discount to Germany in the last few sessions, throwing doubt on the premium of forward products.

Huge surpluses of production should push the Hungarian product down further until at least the end of March, said one trader. This would take the product up to expiry.

Another trader agreed, saying weather forecasts suggested hydro should hold the day-ahead parallel to Germany for some time yet.

Given the greater production capacity of Germany, it looks unlikely that the narrow spread will remain indefinitely.

“I believe that the small spread between Germany and Hungary is the sign that the market is about to turn and the spread begining to widen again. The question is: will it happen tomorrow or in a month?” said one trader. ellie.chambers@icis.com