ICIS Long-Term Power Analytics: Carbon and fuel prices to have greatest impact on German power prices up to 2025

Roy Manuell is an Analyst at ICIS. He can be reached at Roy.Manuell @icis.com. Colton Chow is a Data Science Analyst at ICIS. He can be reached at Colton.Chow@icis.com. This story has originally been published for ICIS Long-Term Power Analytics subscribers on 22 October. 

A scenario analysis of the sensitivity of German prices to variables such as forecast EUA and fuel price rises, thermal and renewable capacity changes and demand demonstrated that carbon, coal and gas prices would have the greatest influence on the market over the next five years. We ran seven scenarios in which we kept a different variable constant at expected 2021 levels through to 2025 to measure the impact of the key price drivers in Germany. The results showed that carbon accounted for 55% of the power price increase between 2021 and 2025, followed by fuel price movements (42%), and then nuclear capacity changes (18%). Renewable expansion accounted for 21% downward pressure on prices during the same period. The study underlines once again the dominance of market forces on German prices as opposed to capacity changes in the country, despite the ongoing coal and nuclear phase-outs.

Background

• The German market will see some significant changes over the next decade as the country aims to reach 2030 climate target
• Germany will begin to phase out its coal and lignite fleet with key deadlines in 2022 and 203
• Germany will rapidly expand its solar and offshore wind capacity by 2030, with onshore wind capacity to increase at a more moderate rate
• The country will also phase out 8GW of remaining nuclear assets by the end of 2022
• We expect carbon prices to rise over the next five years and remain between €40/tCO2e and €50/tCO2e between 2023 and 2025, driven predominantly by the MSR
• We also expect coal and gas prices to recover following lows in 2020 due to weak demand

Scenario set up

• We looked at seven key drives of German prices:
  • Carbon
  • Coal and lignite capacity phase-out
  • Demand
  • Fuel prices (coal, gas and lignite)
  • Gas capacity expansion
  • Nuclear capacity phase-out
  • Renewable capacity expansion
• For each scenario we kept 2021 values constant through to 2025. The 2021 values were taken from our Q3 2020 base case assumptions
  • We chose 2021 values as opposed to 2020 predominantly to reduce the impact of the pandemic on the analysis
  • For all scenarios except carbon and fuel prices we kept only German 2021 values constant through to 2025
  • The carbon scenario kept EU ETS prices constant across all markets. We also kept coal, gas and lignite prices constant across all EU countries in the fuel price scenario
• We analysed the German price increase between 2021 and 2025 for each scenario in an attempt to determine how much of the base case price increase was caused by each factor as a percentage and absolute value
  • To do so, we calculated the increase between German prices in 2021 and 2025 in our base case at €19.18/MWh
  • We then did the same for each scenario and compared these price changes between 2021 and 2025 to that in our base case. Some factors such as keeping renewable capacity at 2021 levels was bullish and meant that the price increase was greater than €19.18/MWh. Others, such unchanged nuclear capacity and fuel prices, were bearish and thus the relative price increase was lower than the base case
  • We then added an additional category ‘other’ worth €0.66/MWh to bring the sum of price increases across all scenarios to equal that of our base case
  • This enabled us to calculate the extent to which each factor had contributed to the €19.18/MWh price increase in the base case scenario

Analysis

Carbon and fuel price influence

• Our analysis indicated that carbon prices will have the greatest impact on German power over the next five years
  • We found that by keeping carbon prices constant at €22.92/tCO2e through to 2025, German power prices were around 20% lower than our base case between 2023-2025. This is the period in which we are most bullish for carbon prices
  • In the carbon scenario, German power prices rose by €8.59/MWh in 2025 compared to the 2021 base price. We calculated that this means that €10.59/MWh of the €19.18/MWh price rise in our base case came from carbon
  • This is equivalent to 55% of the price increase in our base case between 2021 and 2025
  • We expect carbon prices to have more than doubled in 2025 from 2021 levels to €46/tCO2e, meaning that for every €1/tCO2e gain in the carbon price in 2025, German power prices increase by €0.45/MWh

• By the same measure, fuel prices contributed 42% of the German power price increase between 2021 and 2025
  • The impact of fuel prices is so significant due to a market expectation that demand and supply-side weakness particularly in gas markets in Europe will persist through into 2021. This has weakened the forward curve and consequently our price expectations through to 2024
  • In 2025 however, we forecast a more robust gas price as well as stronger coal prices. Both coal and gas prices are to increase by approximately 50% in 2025 compared to 2021 levels

• The impact of fuel and carbon prices far outweighs that of nuclear closures and coal and lignite closures to an even greater extent
  • The impact of nuclear closures would be the most significant bullish driver among capacity changes, accounting for 18% of the price increase in 2025 compared to 2021 levels – equivalent to €3.45/MWh
  • This works out as a price increase of less than €0.5/MWh for every 1GW of nuclear capacity closed between 2021 and 2025
  • Coal and lignite closures however will have a muted impact on prices. Their combined effect would account for 6% of price support or around €1/MWh
  • This falls in line with our previous analysis of the coal phase-out impact in which we found the greatest price effect of coal closures to occur towards the end of the decade
  • With a combined 8.65GW coal and lignite to close between 2021 and 2025 (3.55GW lignite and 5.1GW hard coal), the price increase per GW closed of combined coal and lignite is much lower than that of nuclear at around €0.10/MWh
• We also found that demand increases between 2021 and 2025 would have a limited impact on price, mainly because the demand rise is relatively low at around 20TWh

Bearish capacity changes

• Downward pressure from renewable capacity expansion between 2021 and 2025 is significant and more or less inversely cancels out the bullish nuclear capacity closure impact in terms of the two scenario prices relative to our base case in years 2024 and 2025
  • In the year 2025, renewable capacity expansion exerts downward pressure equivalent to one-fifth of the price change between 2021 and 2025 – around €4/MWh
  • We expect capacity growth of approximately 10GW onshore wind, 10GW solar and 3GW offshore wind between 2021 and 2025
• Gas capacity expansion has a weaker impact, accounting for €1.55/MWh downside pressure or -8% of the price change between 2021 and 2025
  • This equates to €0.2/MWh price downside per GW added by 2025