Surging German wind power generation to continue to crush markets

Author: Roy Manuell

2020/02/04

• January record for wind generation

• Renewable capacity set to increase

• Cheap gas to pressure markets

LONDON (ICIS)--The German wholesale power market continued to demonstrate the bearish potential of high renewable generation in January as wind broke the record for the highest power generation from a single source in a month with the spot delivering at an average €35.00/MWh.

Given the expected level of renewable expansion in the country, prices should continue to feel the downward pressure of high wind generation for the remainder of 2020 and over the coming years.

WIND RECORD

In January, wind broke the record for the highest average power generation in a month of a single technology source in Germany, according to information provided by Fraunhofer ISE.

Wind generation averaged out at 22GW across the month, more than an 8% increase from the 2019 and 2018 January averages and more than double levels seen in 2017.

The average generation throughout January 2020 beat March 2019 that held the previous record for the highest average wind production in a month.

PRICE IMPACT

The bearish wind generation outlook had caused the January ’20 product to slump throughout December’s trading. As a result, the January ’20 Baseload lost 20% from the beginning of December until its expiry.

February also shed a similar total in its final month of trading, including a €1/MWh sell-off in its final session as traders scrambled to drain prior risk from the contract.

Looking ahead at March prices, the same is likely to occur if wind generation forecasts remain strong throughout the next month. If the March ’20 Baseload were to also shed one-fifth of its value in the next month, following the same trend as January and February, the product could hypothetically expire at €26.50/MWh, a downside of more than €6/MWh.

An unseasonably warm winter and cheap gas prices have both played a crucial role is the power market sell-off. Reduced demand has pressured the overall energy complex throughout the winter, weakening the price of gas, coal and lignite-fired generation relative to previous years.

That said, the dominance of wind in January during which the technology generated one-third of German power, means that it has remained a key price driver.

As of 4 February, wind had generated more than 50% of German electricity, albeit with only four sessions completed.

Nonetheless, ICIS analyst generation forecasts expect wind power production to rise over the coming years and continue the persistent uptrend seen over the past decade.

This means that wind generation growth is likely to further increase year on year and continue to pressure markets.

WEAK GAS

The other key generation development in January was the significant slump in hard-coal and lignite-fired generation, offset by the rise in wind as well as surging gas-fired output.

Gas generated only a marginal 1.5GW less than lignite on average in January 2020. This is significant given that only one year ago in January the difference was around 5GW and in 2018 closer to 9GW.

Gas seems to be increasingly asserting its supremacy over coal in the German power generation mix, having generated more electricity all but one month in the last six.

The LNG glut is likely to continue and with gas storage levels high, the bearish factors currently swamp the bullish risks in continental gas markets for at least the first three-quarters of 2020.

ICIS analyst clean dark and clean spark spread calculations that respectively measure the profitability of hard-coal and gas-fired generation indicate that most gas plants will remain more profitable than coal plants for February and March baseload power delivery.

The profitability of gas assets means that its share in the German power mix will not only increase at the expense of coal and to a lesser extent the cheaper lignite plants, but also the cheap gas will force coal and lignite power producers to drop their offers to avoid being priced out of the market.

The overarching result is cheaper German wholesale power prices both at times of high wind generation or otherwise. As Germany is a key generator and exporter in continental Europe, the result is regional downward pressure across all markets.