Gas erodes Belgian power premium over France but nuclear remains decisive

A premium held by the Belgian Calendar Year 2017 electricity product over its French equivalent since mid-February almost halved at the start of April, figures show.

But the spread between the two markets then stabilised after a rebound in natural gas prices began to counter the impact of a previously bearish fossil fuels complex.

Going forwards, much will hinge on Belgium’s nuclear strategy amid calls from Germany to close two 1GW nuclear reactors – calls that have so far been deflected by the Belgian authorities.

Fuels complex

The premium, which had widened from near-parity in late January to a high of €2.275/MWh around mid-March, has since narrowed, hitting a low of €1.125/MWh in mid-April (see graph).

The spread has been tracked using confirmed Belgian power transactions collected by ICIS alongside closing end-of-day assessments for the French and Dutch markets.

The jump on the French Cal ’17 Baseload contract was initially not correlated with fuel prices and traders were puzzled by the apparent lack of fundamental drivers, as carbon prices provided the only clear source of support.

However, the subsequent direction of the fossil fuels complex, particularly natural gas prices, is now seen as the main reason for why the narrower spread to the Belgian market has held.

“The impact of lower gas prices was more clearly seen on the French market earlier in the year, as running hours for gas plants are longer compared to Belgium,” one trader said.

The Cal ’17 contract on the Dutch gas hub TTF, which serves as a benchmark for France, has jumped from under €13.00/MWh on 7 April to over €15.00/MWh on 22 April, according to ICIS assessments.

This brings prices on the front year back to where they were at the start of the year, when the French and Belgian contracts were trading at near-parity.

Belgium premium

There is still a premium in Belgium over France because Belgium does not have a lot of reserve capacity, making the balance of demand and supply more fragile, while there are still concerns regarding the nuclear question, a second trader said.

Belgian nuclear authority FANC responded on 20 April to calls from the German government to close the 1GW nuclear reactors Doel 3 and Tihange 2, saying that it remained convinced that the reactors “comply with international safety standards and that there is no need to shut down these units from a nuclear safety point of view”. Yet, traders are still wary.

Belgium is also both exposed to relatively higher winter prices in France and relatively higher summer prices in the Netherlands, the second trader said.

Dutch power prices have dropped sharply, as a result of German outbound flows at periods of high wind power generation and new coal-fired capacity, but tend to be higher relative to its neighbours during periods of low demand.

“The French market can limit most of its production to nuclear and Germany to coal and lignite during periods of low demand, but the Dutch market still has to rely on more expensive gas-fired generation,” a third trader said.

Several traders pointed to a lack of liquidity as the reason for higher Belgian prices.

“It’s very hard to get a grip on prices in Belgium, as you only have two big participants controlling the market. Prices have been quite stable this year but there is always a risk of volatility, making it a very dangerous market to enter,” the second trader said. joachim.moxon@icis.com