Fundamentals: Nordic power set to gain with French risk yet to be realised

Source: Heren


Wet weather and a strong hydropower balance have shielded Nordic power prices from the recent bullish influence of the French electricity market, but sources are wary that strong gains are likely in the coming weeks as precipitation and temperatures drop.

This means traders could stand to benefit by going long at the back end of the prompt market, for example the weeks, with significant upside risk currently hanging over the upcoming early-winter.

Unseasonably high rainfall applied significant pressure to the Nordic spot over the week ending Wednesday 4 October, with a particularly bearish Norwegian spot shedding almost 30% of its value.

And firm wind output pushed prices in the two Danish zones well below the rest of the region on Monday.

This weather-led support for supply in the Nordic region has meant shockwaves from the French market are yet to be felt in Scandinavia.

French nuclear regulator ASN last Thursday ordered the shutdown of four 915MW reactors at a 9.7GW plant because operator EDF could not prove the facility would be safe in the event of an earthquake. This means three of the plant’s units will now remain offline until at least 2 November.

EDF subsequently revised down its generation forecast for the rest of the year over the weekend.

Renewed French nuclear woes have meant large amounts of risk premium have been traded into the near curves of key European power markets in recent sessions.

But not so in the north of the continent:

“Nordic power finally decoupled [from mainland Europe] because we got so much rain … we saw hydro producers in Norway were forced to produce at low prices,” said one Nordic trader on Wednesday. “So the front of Nordic power should be bearish as it is.”

Hydro control

“[It] doesn’t make much sense that winter prices are not impacted by continental bullishness,” he added. “Temperatures will soon be low enough to give hydro producers control again and with higher alternative prices they will quickly write up their water values.”

According to latest figures released by Nord Pool on Wednesday, hydro stocks stood at 81% of total capacity on Monday. This means the hydro balance is above the level seen in two of the past three years.

But weather forecasts show much drier weather across the region from Monday, with particularly sparse rainfall expected in southern Norway, where much hydro capacity is concentrated.

“The Nordic market has a lot of upside in the case of normalised weather,” the source said. “The likelihood of Nordic power living its own life all the way through the winter is very small.”

German spread

The current premium held by the connected German power market over the Nordic near-curve indicates significant upside potential for Scandinavian prices.

On Tuesday the financially-settled Nordic Q1 ’18 contract settled on the Nasdaq exchange at €31.65/MWh.

This means the product was valued a substantial €8.25/MWh below the equivalent German over-the-counter contract assessed by ICIS. In stark contrast, strong wind in Germany pushed the day-ahead product comfortably below the Nordic system spot price on Wednesday.

“When the hydro balance was slightly lower and the general [system] balance is a little more strained we had a higher correlation with French and German power,” said a second Nordic trader in reference to previous years. “That correlation has now broken down.”