German influence over Dutch power increases, may dislodge TTF

Matthew Jones

27-Apr-2016

The German power market has strengthened its influence as a driver of Dutch near- and far-curve power contracts since the introduction of flow based market coupling (FBMC), according to ICIS analysis.

And, although the Dutch TTF natural gas price remains closely correlated with both the near- and far-curve in the Netherlands, the German power market looks set to become the most important driver of Dutch curve prices.

FBMC, which is designed to ensure more efficient use of cross-border transmission capacity in Centralwest Europe, was introduced in May last year. It directly affects Germany, France, the Netherlands, Belgium and Luxembourg while indirectly influencing a number of other European power markets with links to any of those countries.

Wind fluctuations in Germany had long been an important driver of day-ahead prices on the Dutch market because of 3GW of interconnection capacity linking the markets.

However, German power has not traditionally been as strong a driver for near-curve contracts, such as the front month.

Instead, the TTF natural gas hub has historically been the strongest driver for front month power prices in the Netherlands owing to the fact that gas is the marginal fuel in the country.

Correlations

According to ICIS calculations, from the start of 2013 until 19 May 2015 – the day before FBMC came into place – the correlation coefficient of the Dutch power front month to the German power front month was 0.81, where 1 is perfect positive correlation and -1 perfect negative correlation.

This has increased to a 0.96 correlation in the period since FBMC was introduced.

By comparison, the correlation between the Dutch power front month and the TTF equivalent contract was 0.92 in both the pre- and post-FBMC periods analysed.

Further out on the curve, the Dutch power year-ahead contract has also begun to correlate more closely with German power, with the products increasing from a correlation of 0.87 from 2013 up to the introduction of FBMC, to 0.98 since then.

During the same periods, the correlation between the Dutch power and TTF year-ahead contracts also increased, from 0.93 to 0.97.

Flow-based market coupling

The new methodology for calculating cross-border capacity on a day-ahead basis on the borders between Germany, France, the Netherlands, Belgium and Luxembourg was introduced on 20 May (see EDEM 14 May 2015).

The flow-based market coupling methodology takes a system-wide view of available transmission capacity, rather than a line-by-line approach, and is designed to ensure more efficient use of cross-border electricity transmission capacity in Centralwest Europe.

FBMC has led to higher cross-border flows and brought wholesale power prices closer together in the region.

Outlook

The German power market may well now become the most important driver of Dutch curve prices, even ahead of the TTF.

This is because the German power market’s influence over the Dutch electricity curve is likely to increase once additional interconnectors are constructed between the two countries.

The 1.5GW Doetinchem-Wesel cable is expected online in the first half of 2017. Following this, the capacity of the existing Meeden-Diele interconnector could also be expanded, according to transmission system operator TenneT. matthew.jones@icis.com

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