CCGT margins to withstand volatile market conditions

• Tighter LNG supply to support near-curve gas products

• Carbon bull-run momentum slowing

• Despite clean spark volatility CCGT’s are still highly profitable

LONDON (ICIS)–Short-term profit margins for European gas-fired electricity generation are set for increased volatility in July.

Gas prices will be supported amid tighter supply margins, while French nuclear concerns leave the power outlook uncertain.

However, it is carbon that is likely to trigger imminent price shocks with questions arising over the sustainability of the market’s bull run at the expense of low fundamental support.

Despite clean spark spreads volatility likely increasing in coming weeks there will be minimal switching away from gas-fired generation with gas profit margins still high.

CARBON VOLATILITY

The European carbon price rallied to a 11-month high on Monday as speculative trading and technical strength continued to push the market to fresh highs, although the market has drifted slightly lower since then.

A fresh push higher is likely to depend on whether investment funds continue to build their long positions with €30/tCO2e a key target. The fundamental picture is broadly weak for the remainder of 2020, largely triggered by disrupted industrial activity due to the coronavirus.

In the longer term, structural reform of the EU ETS is up for discussion in 2021 with talks regarding the operation of the Market Stability Reserve which aims at providing carbon price stability.

“Carbon players are bit too optimistic about reforms,” said one trader. “Basically, it is looking fundamentally very bearish but the market is front-running a potential reform,” added the source.

A second source added that should the market turn bearish then the sell-off would be pronounced: “I’d say €25/tCO2e or €22/tCO2e should be a reasonable level for a correction.”

FRENCH NUCLEAR UNCERTAINTY

French nuclear availability dominated headlines again on 2 July when energy giant EDF revised nuclear output expectations for 2020 from 300TWh to 315-325TWh. This triggered a sell-off in later-dated French power prices and curve contracts in neighbouring electricity markets with gas demand forecasts revised down in the process.

In week 28, a portion of these losses were clawed back amid uncertainty in the nuclear schedule. Recent ICIS analysis indicates that current projections of nuclear availability for 2020 would have to be revised down to meet the 325TWh annual target, according to data from French grid operator RTE.

Some French nuclear risk premium therefore remains with availability likely to change again according to traders. This in conjunction with the still-present risk of a heatwave in the third quarter and cold spells in the fourth quarter, should limit the downside for power curves moving forward.

GAS BITES BACK

A sharp drop in LNG supply delivered into northwest Europe have bolstered near-curve gas prices with the Dutch TTF and British NBP front month rallying 47% and 67% since 1 June.

European terminals received 5.1million tonnes in June which was a 16-month low as US LNG cancellations kicked in for the month.

Reduced US deliveries across the Atlantic is expected to continue into the latter half of summer, with Spain being a potential exception due to the large Spanish offtake from US plants.

Lower US feedgas levels are likely to coincide with upcoming cancellations. Some sources see July as the peak for 2020 curtailments.

Around 12 cargoes are expected to arrive in France within the next two weeks and Britain could only receive four shipments in the next two weeks.

Stronger gas price moves on the back of tighter LNG supply will weaken gas plant profit margins but not to the extent for any switching to alternative fuels to take place.

Pronounced bull runs however will continue to be capped due to the storage situation across Europe with inventories at 80% full, 6 percentage points higher year on year.

Additional reporting by Arun Toora