Risk premium has ironed out across winter contracts on Europe’s electricity markets ahead of the high-demand season, figures show, indicating an increase in supply confidence spanning the season.
But some traders have questioned this confidence, with French nuclear availability and the durability of south east Europe’s healthy hydroelectricity stocks emerging as potential swing factors in the event of a cold snap.
Most European markets are valuing Q4 ‘13 and Q1 ‘14 closer together than at the same period last year, despite the cold snap at the end of Q1 this year.
The flatter quarterly profile suggests markets are unwilling to take a bet on the timing of any cold snap at this stage of the year – the over-riding factor that defines short-term trade across the winter ( see EDEM 25 April 2012 ) – preferring instead to take positions based on less risk-induced factors. The reluctance is symptomatic of the risk aversion defining energy markets in recent years, which has pushed many financial institutions across Europe to exit ( see EDEM 6 September 2013 ).
The nuclear factor
France and its nuclear generation is one potential issue, keeping the French Q4-Q1 spread wider than most markets. The French Q1 ’14 contract carried a €2.63/MWh premium over Q4 ’13 on the last day of September, which was significantly higher than the €0.55/MWh spread between the winter quarters two years ago.
Traders have concerns surrounding nuclear availability in France this winter, on grounds that incumbent generator EDF has been behind schedule on ramping up nuclear availability in autumn. This has not yet led to system strain because temperatures have been above average, traders said, but the Q1 ’14 contract was holding a fair premium over Q4 ‘13 because of the risk of cold weather-driven demand spikes under insufficient nuclear availability.
The spread was however narrower than the previous winter’s €3.00/MWh spread, with lower export demand from Belgium expected because Electrabel’s Doel 3 and Tihange 2 nuclear plants, of combined 2GW capacity, will be in service, whereas they were off line in 2012.
Higher wind generation
French nuclear will also exert influence on Germany over the winter, traders said. Risk for German power remains on the downside amid high domestic renewables output, although France could change the picture if nuclear availability across the border turns out to be insufficient to meet demand.
Poor nuclear power plant availability in France supported winter contracts in the run-up to winter 2012, visible in a heightened €1.95/MWh German spread between Q1 ’13 and Q4 ’12, compared with €1.05/MWh this year.
However, the previous winter’s risk premium melted away over the Christmas break, when high wind and mild temperatures pushed spot power prices into negative territory ( see EDEM 27 December 2012 ). Therefore, wind power generation will also be a big factor for spot prices with solar power generation having potential to keep midday prices in check.
In theory, wind power generation could significantly depress spot power prices, even on a day with maximum annual load, put at 84GW by the country’s four grid operators. Power prices could crash if wind power provides a third of demand, according to UBS analyst Per Lekander ( see EDEM 10 December 2012 ).
The quarters paint a similar picture of increased winter supply confidence in the UK. Last year the UK Q1 ‘13 carried a £6.55/MWh (€7.74/MWh) premium over Q4 ’12 going into the winter. This year the equivalent spread stood at just £2.70/MWh.
Gas storage stocks are considerably lower this year, but traders are confident of enough gas being injected this month to meet demand, at least for the moment ( see EDEM 23 September 2013 ).
But other drivers, potentially interconnected markets, are also at play, and the UK market suggests that risk is on the downside. A relatively tight discount on average day-ahead delivery this year to 30 September and the Winter ‘13 contract – at £2.97/MWh, the discount is similar to last year but tighter than £7.55/MWh in 2011 – is evident because wind output has been quite low all summer, lifting day-ahead values.
This indicates that, if wind gets going, the prompt could fall below where winter expired. This would present an argument for buying on the prompt rather than forward contracts for winter delivery as wind achieves deeper penetration on the system, while buying the summer contract rather than prompt buying.
The Netherlands completes the picture. A tight spread between Q4 ‘13 and Q1 ’14, of just €0.10/MWh, suggested market participants were more confident about supply security. In fact, the Dutch market was alone with Poland in valuing Q4 ’13 above Q1 ’14, albeit at a marginal premium.
Again, nuclear has emerged as a vital driver, with neighbouring Belgium’s plants ironing out risk across the winter. As a whole, the market appears less plagued by supply concerns, with the winter quarters averting €0.425/MWh below the previous year’s corresponding value.
Despite this, the Dutch TTF natural gas hub closed Winter ‘13 at a €0.375/MWh premium to the previous winter – a dire economic picture for gas-fired generators.
Any emergence of nuclear unreliability across western Europe could, via Germany, influence some central and eastern European markets. In the Czech Republic, the Q4 ‘13 contract closely tracked movements on the German market throughout September.
In common with the rest of the continent, the spread between the Czech quarters contracted by 44% year on year. Traders attributed this to improved hydro levels in the Balkans this winter.
But despite expectations for comfortable supply in the Czech Republic, one trader pointed to possible system strain in Austria, suggesting this might affect bordering countries. “The market might be lacking some hydro in the Austrian Alps, which might tip the balance [in the region],” he said.
Barring cross-border issues, spot levels this year to date suggest a soft winter. Sentiment has been bearish throughout the summer, with some sources expecting day-ahead levels to continue this trend. The source pointed to the winter holiday season hitting the market in December. “We will have 10 days of holiday, not to mention two weekends, so December may drag the [front] quarter down,” he said.
Hydro levels are also defining the Hungarian outlook. Last year traders injected more risk premium into Q1 ’13 compared with Q4 ’12 – €2.50/MWh – because Balkan countries were struggling with supply shortages on the back of extremely low hydro reserves.
This year the hydro supply has been very healthy, and the spread stood at just €0.55/MWh. However, traders questioned the tight spread. One noted that, while he did not have supply concerns for the ongoing quarter, Q1 ‘13 was “unpredictable”. An unexpected cold spell in Q1 ’12 led to almost all Balkan TSOs announcing force majeure and closing their borders.
What is close to being a Europe-wide trend breaks down in Poland, underscoring the market’s independence from European drivers. The market valued Q4 ’13 at Zl2.30 (€0.55)/MWh above Q1 ’14, while last year, the spread was Zl4.75/MWh below.
Traders said the premium was down to high spot prices this year so far, boosted by exports to Germany, which pulled up the October expiry price. As a result of the high spot, the October contract closed above Zl162.00/MWh which lifted Q4 ’13 relative to Q1 ’14.
One source said that the weak December could put pressure in Q1 ’14 product. “This period will typically be cheaper compared to October and November due to lower demand,” he said.
In Italy, a long-term bearish trend appears to be dominating sentiment, regardless of seasonal factors. Spot prices continued to shed ground in 2013 compared with previous years, depressed by low electricity demand, which this year has been 3% lower than last.
Market participants said, given the supply demand-balance, it would take extreme weather conditions this winter to trigger any spike in spot prices. ICIS staff