Hungarian-Romanian power spreads to flip from 2020 – ICIS Power Horizon

By: Vija Pakalkaite,  Anise Ganbold  and Zaheer Ahamed

LONDON (ICIS)–Romanian average wholesale power prices are forecast to switch to a premium to Hungary from 2020, ICIS power market modelling suggests.

The average annual spread is forecast to widen to €8/MWh by 2024, before narrowing again in 2028. This will be mainly due to fundamentals in Romania: rapidly falling thermal generation capacity, bullish EU ETS prices driving up lignite generation costs, and rising power demand.

Historically, prices in Romania have been cheaper than in Hungary as the former is a net exporter. The ICIS Power Horizon model suggests the spread will switch in 2020 to a roughly €1/MWh Romanian premium.

The Romanian Calendar Year 2020 Baseload has been trading at a discount to the Hungarian equivalent on the over-the-counter market so far this year, reflecting different market expectations. However, the spread has been gradually narrowing in recent months.

LONG-TERM PROJECTIONS

Power prices in both countries are forecast to peak in 2025, at €77.01/MWh in Hungary and €84.29/MWh in Romania, driven by capacity closures, and ICIS’s bullish view on long-term EU ETS prices.

By 2029 the markets should converge again, as falling EU ETS prices drive down thermal generation costs, renewable capacity rises, and Romania commissions two new nuclear units.

PRICE DRIVERS

Romanian thermal generation capacity is forecast to decline quickly in the mid-2020s because of emissions limits and ageing capacity.

Romania is likely to lose approximately 60% of its coal and lignite capacity and 45% of its gas capacity in this period. At the same time, Romanian renewable capacity growth will be muted because of lack of ambition in the country’s draft national energy and climate plan (NECP).

Separately, the conclusion of power purchase agreements (PPAs) for unbuilt projects is currently forbidden, although this is expected to change later this year (see separate story).

Forecasts for rising EU ETS carbon prices into the mid-2020s has a stronger bullish effect on Romania than in Hungary, as it is more dependent on lignite generation. Prices in Romania are expected to re-converge with Hungary from 2029, due to the expected commissioning of two new nuclear units at Cernavoda.

Power demand in Romania is forecast to grow by an average of 1% per annum, which widens the gap between generation and demand from zero in 2019 to 6TWh by 2024.

In Hungary, new and higher-efficiency gas-fired plants commissioning in the mid-to-late 2020s, and the start-up of 500MW Matra 3 lignite plant in 2027 are key drivers keeping Hungarian power prices below Romania’s.

In addition, ICIS assumes Hungary will see rapid growth of solar PV, albeit to a lesser extent than in its draft NECP, as well as the resumption of growth in onshore wind capacity in the mid-2020s.

KEY RISKS TO ASSUMPTIONS

There is a significant risk that one or both Cernavoda nuclear units in Romania will not be built due to a disagreement with the Chinese investor.

The bullish impact of rising EU ETS prices in Romania could be muted: Romania is considering implementing a CO2 emissions compensation scheme for big emitters, which could also prolong the life of some of these plants.

There are risks that the Matra 3 project in Hungary will not be realised, and at the same time the operation of the less efficient current Matra units could be extended to 2029.

There is also the risk that the high-efficiency CCGTs in Hungary will not be built. The Hungarian energy regulator has been challenging the grid operator’s plans, and a future capacity mechanism in Hungary is currently obscure.

There is also political and regulatory risk. There has been significant overhauling of energy regulation in Romania, creating uncertainty for investors and market participants.

Furthermore, both the timings and net capacity increase of new projects connecting the region with Serbia , and with a newly-liberalised Ukrainian power market are likely to change.

Interested in learning more about long-term power market analysis? Register now for a free trial of ICIS Power Horizon, a pan-European power price forecast service, by contacting justin.banrey@icis.com