Fundamentals: ‘Crazy’ upside risk hanging over Nordic power market

Source: Heren


Healthy hydropower reserves have continued to insulate Nordic wholesale electricity prices from the influence of French price spikes over the past week, but sources have warned of “crazy” upside risk if Scandinavian fundamentals turn more bullish.

This suggests traders may benefit by taking a long position at the back end of the prompt market into the front month, especially as temperatures across the region begin to drop over coming weeks.

French generation giant EDF said on Wednesday it had informed the country’s nuclear regulator ASN of potential safety issues with pumping station pipes at 29 of its nuclear units (click here to read story).

The news immediately triggered another price surge across the French power market, adding significant additional premium to an already risk-heavy curve.

France’s nuclear problems have been ongoing for a number of weeks. ASN recently ordered the shutdown of four 915MW reactors due to safety concerns.

Strength in France has supported near-curve prices at key European power markets in recent weeks.

But ongoing strong rainfall across the Nordic region has meant prices have been shielded from the bullish influence of France.

Ticking time bomb

“The Nordics are still wet and the spread to continental prices is widening,” said one Nordic trader on Wednesday. “So in the case of a dry and cold spell in the Nordics, the upside will be crazy.”

Significant rainfall over the past week meant hydro stocks improved at a time of year when they would normally be declining.

Latest figures released by Nord Pool on Wednesday show hydro stocks climbed over 2 percentage points week on week to Monday, with reservoirs now at an annual high of almost 84% fullness.

Weather forecasts show significantly above-average rainfall in the coming week, meaning bearish hydro is likely to continue to cushion the Nordic near curve against strength in continental markets.

“Weather forecasts aren’t dry enough to threaten hydro resources,” said a second Nordic power trader on Wednesday.

“There should be some decoupling in the shorter contracts from the action in France.”

Evidence of the protective influence of bearish hydro in the Nordics exists in the current spread to the interconnected German power market.

Strong wind output has often pushed the German spot price below the Nordic system price in recent weeks. In fact the average day-ahead price since the start of October has been €28.70/MWh in the Nordics, Nord Pool data shows, yet Germany has been marginally lower, at €27.26/MWh, according to EPEX Spot.

But the German curve continues to carry a substantial premium over the Scandinavian market (see graph). On Tuesday, the financially-settled Nordic front-month contract closed at €29.72/MWh on the Nasdaq exchange – almost €11.00/MWh below the equivalent German over-the-counter product as assessed by ICIS.

“As soon as weather normalises we’ll start closing that spread,” the first trader said. “Of course it could take a long time before it blows.”