German power market 2.0 to herald five-figure hourly price spikes

16 February 2016 14:09 Source:ICIS
Electricity

The German wholesale electricity market will see five-figure hourly power prices on a same-day basis within the next three years, according to the intraday trading director at one of Europe’s largest utilities.

Occasional hourly peakload prices will be pushed towards the €10,000/MWh mark as Germany, Europe’s largest power market, looks to guarantee supply security through price signals as opposed to regulatory intervention under its newly-designed power market 2.0.

And within a 7-10 year time-frame, hourly peaks prices on a day-ahead basis will hit similar eye-watering highs, according to Vattenfall Energy Trading intraday director Hartmuth Fenn.

“We have to accept that we will see prices in the one-, two-, even ten-thousand euro segment because that’s the only way that peak-load demand will be managed at times,” Fenn said at the E-World energy event in Essen, Germany on Tuesday. “If we accept that then we can make do without capacity fees [a capacity mechanism].”

The four- or five-figure sums will become a feature of Germany’s new market partly because the redesign is aiming to allow the market to put a value on scarcity at times of power system stress by sweeping away any price caps or other interventionist instruments.

Germany has, unlike a number of other European countries, opted to design its next-generation power market without a capacity mechanism through which capacity owners can be paid just to be available.

“We will rely on the market,” energy ministry supply security head Kathrin Thomaschki said. “Our firm conviction is that the market will provide the right mechanisms.”

The low-price effect

But alongside what is a conscious decision at a political level to avoid intervention where possible, the emerging low power price environment will, paradoxically, also contribute to the sharp short-time price spikes.

This is because the developing trend of oversupply amid low-cost renewable generation, which is resulting in very low baseload power prices, is forcing some conventional generation, including gas- and coal-fired power plants, to close.

Therefore as the average price of power for delivery in any given hour – effectively baseload generation – falls due to increased low-cost renewable generation, thermal plants close, but this increases supply volatility, leading to occasional surges in hourly peaks prices.

And the shift is already in evidence. Fenn said Vattenfall had started up some otherwise-dormant gas-fired power plants on a number of occasions over the last six months in response to intraday power prices of up to €400.00/MWh, a move that the company had not deemed necessary for the last four or five years prior to this. jamie.stewart@icis.com

By Jamie Stewart