LONDON (ICIS)--French power for delivery in the third quarter of the year flipped to a discount to Germany on 4 June, according to ICIS assessments, reflecting the flood of power supply expected over the rest of the summer.
Given the current supply picture, the French discount to the German market could widen over the summer as traders continue to drain risk premium from the French market due to high nuclear confidence in the country.
Confidence in French nuclear
The French Q3 ’19 Baseload had traded at an average of more than a €0.60/MWh premium to the German product over the first five months of the year, as assessed by ICIS.
However, confidence in French nuclear availability has grown among market participants following relatively stable supply in 2019.
According to French operator RTE, the current outlook for the availability of the country’s 58 nuclear reactors throughout July and August averages out at 75% online. These are the two hottest months when outages are the most likely.
In recent sessions, traders have drained much of the nuclear risk-related premium from French summer contracts as a result. This pressured the French Q3 ’19 Baseload to flip to a discount to the German equivalent on Tuesday.
Participants had priced in risk following significant outages at French nuclear plants last summer which caused price spikes.
Given recent market movements, current spreads between French and German power for delivery in July and August may even be too narrow.
On 4 June, the French July ’19 Baseload was assessed at a €0.55/MWh discount to Germany and the August product at a €1.00/MWh discount. This compared with a €0.05/MWh discount for the Q3 ’19 product.
One trader said that he envisaged the July and August spreads to widen to “up to a €2/MWh French discount” given current nuclear availability expectations as well as recent spot prices.
French spot discount
The French Day-ahead settled at an average discount of €0.85/MWh to the German product in May, EPEX SPOT exchange price settlement data showed. This compared with an average premium of more than €1/MWh in April and €6/MWh during the first quarter of the year.
“I think the spot situation is the driving factor behind the French summer discount that we are seeing,” one trader told ICIS on Wednesday.
Furthermore, the French discount has showed no sign of disappearing in June and has averaged more than €2.50/MWh for power delivered during week 23, in part due to relatively low wind output in Germany. This is likely to continue over the summer months when European countries typically receive less wind and more sun.
Incidentally, France has added solar capacity over the last year. This should add pressure to its power prices in July and August and help its discount.
Carbon to drive Germany
Meanwhile, bullish potential in carbon prices will support the German market and encourage a French discount.
Germany relies to a greater extent on coal and lignite-fired capacity at times of low renewable output which makes German prices more susceptible to fluctuations in carbon movements due to their emission intensive nature. They contributed approximately 40% of German electricity in July and August last year. Nuclear generation is almost carbon free, which renders the French market relatively less reactive to bullish EUAs.
ICIS analyst carbon forecasts expect the benchmark December ‘19 EUA to rise above €28/tCO23 during the third quarter of the year. The product traded below €25/tCO2e during week 23.
Actual French nuclear availability during the summer months in recent years has often been below forward forecasts made during the second quarter. They have also been far below current forecasts for the third quarter of the year. There is a significant likelihood that less capacity will be operational than current expectations.
Nevertheless, if temperatures are not unseasonably warm this summer as was the case in 2018 then this will reduce the risk the nuclear capacity that requires water to cool reactors and likely keep French power trading at a discount to Germany in July and August.