ICIS Power Horizon: Romania power prices to switch to a premium to Hungary from 2020

Source: Heren

2019/06/28

This story has originally been published for ICIS Power Perspective subscribers on 28 June 2019 at13:03 CET.

Romanian average wholesale power prices are forecast to switch to a premium to Hungarian prices for the first time since the 4M MC day-ahead market coupling arrangement was established in 2014. The annual average spread is forecast to widen to €8/MWh by 2024, before narrowing again by the end of the decade. This will be mainly due to fundamentals in Romania, such as falling thermal generation capacity, bullish EU ETS prices and rising power demand, and expected more efficient power production sources in Hungary.

ICIS price forecast

  • Romanian average wholesale power prices are forecast to rise sharply to 2024, switching to a premium to Hungary, for the first time since 4M MC (NTC-based day-ahead market coupling, known as 4M MC, between CZ, HU, RO and SK) was implemented in late 2014
  • Between 2015 and 2018, prices in Romania have averaged at a discount to Hungary. The average annual price spread ranged between €2.4 and 8.4/MWh (see below chart)
  • ICIS power modelling suggests the spread will switch in 2020, and that Romanian prices will average above Hungarian prices until at least 2030
  • Power prices in both countries will peak in 2025, at around €77/MWh in Hungary and around €84/MWh in Romania, after which point they will start falling and merge at around €67/MWh in 2030

Price drivers-Romania

  • Romanian thermal generation capacity is forecast to decline quickly in the mid-2020s because of emissions limits and ageing capacity. We assume it loses 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 draft national energy and climate plan (NCEP) and the present prohibition on PPAs for unbuilt projects
  • Power demand is forecast to grow by an average of 1% per annum, based on load forecasts made by the TSO, Transelectrica. As a result, the gap between generation and demand widens from zero in 2019 to 6TWh by 2024
  • The ICIS long-term carbon model sees the prices of EUAs peaking at €42.3/tCO2e in 2024. Rising forecast EU ETS carbon prices has a stronger bullish effect on Romania, as domestic lignite has a higher carbon intensity per MWh of power produced than lignite in neighbouring markets
  • In peak demand hours we forecast that Romanian import capacity will be increasingly fully-utilised, meaning that Romanian power prices become more and more likely to spike in order to trigger costlier, domestic production such as low-efficiency CCGTs i.e. old Brazi units
  • Falling generation capacity combined with rising fuel and carbon prices means ICIS forecasts Romanian power prices to exceed €80/MWh on an annual average basis by 2024
  • This situation continues until the commissioning of the planned two new units at Cernavoda nuclear power plant, ICIS assumes, from 2029

Price drivers - Hungary

  • New and higher efficiency gas power plants and Matra 3 are key drivers keeping Hungarian power prices below Romania’s, as well as imports from connected countries
    • We assume the Matra lignite power plant begins to close from 2025 when its license expires, and that the 500MW Matra 3 lignite unit comes online from 2027
    • No new nuclear capacity is assumed to come online in Hungary before 2030. Based on our market sources the planned unit Paks 2 is facing delays
    • We assume the gap in generating capacity is partially replaced with high-efficiency CCGTs coming online from the mid-2020s, partly in line with the expectations of the Hungarian TSO Mavir, albeit less capacity and later than the TSO assumes
    • The current Hungarian government focuses on solar growth over wind in its current policies and draft NECP
      • We assume a rapid growth of solar PV, although to a lesser extent than in the NECP
      • We assume onshore wind resumes growth, which has been stalling in Hungary since 2010, only after mid-2020s
    • Hungary is forecast to remain a net importer and benefit from lower power prices in Austria, Slovenia and Slovakia. In Slovakia prices are suppressed by new nuclear capacity

Key risks

Romania

  • There is significant risk that one or both Cernavoda nuclear units will not be built, due to a disagreement with the Chinese investor
  • The bullish impact of rising EU ETS prices could be muted: Romania is considering implementing a CO2 emissions compensation scheme for big emitters. This could also prolong the life of some of these plants
  • Political/regulatory risk: there has been significant overhauling of energy regulation in the country, creating uncertainty for investors and market participants

Hungary

  • There are risks that the Matra 3 project will not be realised, and at the same time the operation of the less efficient current Matra units is extended to 2029
  • There is a risk that the high-efficiency CCGTs will not be built. The Hungarian energy regulator has been challenging Mavir’s assumptions, and the future capacity mechanism in Hungary is currently obscure
  • Political/regulatory risk

Cross-border interconnections

  • The planned Mid Continental East Corridor project will increase interconnector capacity between Romania, Serbia and Hungary but timings are uncertain
    • We assume the RO-RS line commissions from 2021, whilst the RO-HU line commissions after the upgrading of the final power station, from 2027
    • However, there is uncertainty as to the commissioning dates, as the project consists of many sub-projects consisting of new line laying to upgrading numerous substations throughout Romania and each are expected to finish at different times
  • In 2017, the Ukrainian TSO Ukrenergo signed an agreement to synchronise its network with the Continental Europe Network, and in June 2019 the Ukrainian government expressed its support to the synchronisation
    • Presently Ukraine’s energy island, “Burshtyn Island”, is synchronised with the EU, with a maximum export capacity of 650MW, and market participants expect the cross-border capacity to increase by more than four times
    • The timeline is unclear when the synchronisation would happen
    • Ukraine is scheduled to adopt a liberalised energy market from July 1, 2019 though this may be delayed

Anise Ganbold is Senior Analyst - EU Carbon & Power Markets at ICIS, responsible for the Romanian forecast. She can be reached at anise.ganbold@icis.com

Vija Pakalkaite is Analyst - EU Carbon & Power Markets at ICIS, responsible for the Hungarian forecast. She can be reached at Vija.Pakalkaite@icis.com

Zaheer Ahamed is Quantitative Analyst - EU Carbon & Power Markets at ICIS. He can be reached at zaheer.ahamed@icis.com

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