Romania-Hungary cross-border capacity price expected to rise

11 July 2014 06:00 Source:ICIS

Traders polled by ICIS are split over what direction Hungarian electricity prices will take in Q3, following Romania’s recent scrapping of the export fee. The majority of traders expect further upside to the cross-border capacity (CBC) price, however.

The Romanian bill scrapping the country’s remaining component of the export tariff, the cogeneration fee came into force on 1 July and wiped some €4.00/MWh off the cost of exporting electricity ( see EDEM 2 July 2014 ).

Market participant views varied about how this would impact Hungarian and Romanian power prices in the next few months.

“We saw a lot of flows because the export fee came down,” said one source.

Cheaper Romanian electricity usually flows into more expensive Hungary. But spot prices in the first nine days of July were volatile as the spread on the exchange outturns oscillated between sharp losses and gains. The highest Romanian spot premium to Hungary settled at €9.82/MW, and the largest discount at €3.60/MWh. Electricity flows mainly drove the price fluctuation, traders said.

Cross-border capacity cost

Traders expect more upside potential for the cross-border capacity cost on the Romanian-Hungarian link from September onwards. “I think most of the support will be on the capacity prices,” one regional trader said.

According to monthly cross-border auction results on Tuesday, the cost of flowing electricity in August from Romania to Hungary settled around €3.66/MWh. This was below traders’ expectations.

A second source explained: “The capacity cost did rise so a part of [the export tariff] was indeed reflected in the price.” He added that the recent volatility of the spread between the two markets had led to lower bids for capacity.

A third trader agreed and said: “Ever since the month started, the Romanian prices have rocketed. Now the bids were lower because the spreads will not be that high.”

Market impact

The recent trend of strong Romanian spot prices has raised questions over the market’s development in coming months, with some traders questioning if the spread is sustainable.

Most market participants expect the impact on prices in Q3 ’14 to be limited, but have pointed to some pressure for Hungarian prices and support for Romania.

“From the last weather forecast, [in Romania] it should be dry and hot weather so I see the current strength continuing,” a fourth trader said.

A fifth source said that more pressure would hit Romanian prices despite the current bullish situation. “Everyone is buying from Romania and the country is not relaxed. Demand is high, [there is] low hydro and no wind [output],” a sixth trader said. Hydro stocks remain up at 99% fullness, as the country is saving water for hot days, while the Danube’s inflow remains well below the monthly average, latest data shows.

The sixth source argued that August was typically ruled by the uncertainty of heat waves in both Hungary and Romania, which had added some risk premium into the prices. “It is not only the reduction [for available capacity on Hungarian borders] that caused this [spread]. It is a general increase in demand, little renewable production in Romania and just a low availability that is causing the current spread between Romania and Hungary,” he said.

Imports into Hungary in August will be limited by reduced flows on some interconnectors on the border with Slovakia.

The latest ICIS assessments on Wednesday 9 July show that the Romanian August ’14 contract settled at a €4.088/MWh discount to its Hungarian counterpart.

Expectation for the cogeneration fee to be eliminated initially boosted cross-border capacity in July ( see EDEM 11 June 2014 ). Sophie Udubasceanu

By Sophie Udubasceanu