Analysis: Cheap gas pushes Italian Q3 power prices to record lows

03 July 2014 15:38 Source:ICIS

The price of electricity delivered in the Italian traded market this summer has sunk to the biggest discount to winter deliveries for five years.

High stocks of gas, a key fuel for Italian power plants, are keeping summer prices down. Winter prices, in contrast, have not fallen as fast, underpinned by a need for Italian buyers to bid high enough to attract French imports over that period.

The Q3 ’14 Baseload contract in the Italian wholesale electricity market went to delivery on 30 June at the lowest price for an Italian Q3 contract since 2007, when ICIS started assessing it.

At the same time, the Q3 ‘14 contract was €50.65/MWh was €5.03/MWh cheaper than power with delivery over the winter months in Q4 this year.

This was one the widest gaps between the two products recorded since 2009, but in line with a general trend observed for the Q3 ‘14 contract from 21 January onwards, when the product first became cheaper than its Q4 equivalent.

Since then, the trajectory of the Q4 contract stood consistently above Q3 prices – only the second time this has happened since 2012 (see graph 1). Traders point at parallel movements on the equivalent contracts on the Italian PSV natural gas hub as the main reason behind the curve shift.

The fact that the first winter-quarter contract is more expensive than the second summer quarter is customary on the PSV hub.

Demand for gas tends to be higher in winter, as heating is switched on. Electricity demand is supported by consumption for air conditioning during the summer period, but higher exposure to sun typically returns high solar production from Italy’s 18GW-installed photovoltaic capacity.

This factor usually keeps demand for gas for power generation under control – unless temperatures spike to a level at which gas-fired power production makes up for consumption peaks.

Yet the price differential between the Q3 and Q4 PSV contracts has been considerably higher in 2014 than in 2013, and widened steadily between April and June, ICIS data show (see graph 2).

Sources polled by ICIS agree that the price cliff between Q4 ’14 and Q3 ’14 on the PSV market lowered the floor price for Q3 ’14 on the power baseload market, while still supporting Q4 ’14 Baseload prices.

“The 2013-2014 winter season had quite mild temperatures compared with seasonal averages. This left gas storage levels high year on year, and the system entered spring with more than enough gas,” one trader from a utility company highlighted.

Italian gas stocks were 122% higher year on year on 1 April according to ICIS data, with storage capacity 26% full (see sister publication EUGF 1 April 2014).

Abundant gas supply and persisting low energy demand in the country, as macroeconomic indicators still stall, have weighed heavily on the price for gas deliveries over summer at the PSV gas hb.

The Q3 ’14 Baseload contract on the power market dived as a result, since PSV prices are a major determinant of curve power prices in Italy.

The price spread between baseload power with delivery in France and Italy may be a second source of support for winter power contracts compared to summer equivalents.

“Historically, [Q4 ’14 Baseload on the French wholesale electricity market] doesn’t go below €48.00-49.00/MWh. If the French equivalent stays at that level, the Italian Q4 ’14 contract usually stays at €56.00-57.00/MWh – no matter how cheap gas can become on the PSV,” one the source said. “It’s a normal bid-up behaviour linked to import costs from France.”

The Italian premium to France is generally much higher in summer than in winter, which leaves more room for the prices to go down and still attract French imports.

The Italian premium to France for Q3 ’14 deliveries stood at €19.125/MWh on 30 June, when the contract was last traded. The Q4 ’14 premium was assessed at €7.825/MWh by ICIS on 1 July.

The French Q4 ’14 contract dived for the first time below the €48.00/MWh on 1 July, and was assessed at €47.45/MWh the following day. Riccardo Patrian

By Riccardo Patrian