Risk sold out of power markets as winter’s end nears, but hydro offers upside

ICIS energy staff

07-Mar-2017

The absence of substantial late-winter cold and the stabilisation of French nuclear power contributed to a Europe-wide decline in front-month risk premium across wholesale electricity markets in February.

ICIS baseload indices for March ’17 showed a month-on-month dissipation of risk for the back end of this winter, although the inflationary impact of the early winter’s nuclear problems was noticeable, with major year-on-year increases at all markets apart from Poland.

Only depleted hydropower stocks across large swathes of the continent offered any upside risk to near-curve and by extension summer delivery contracts.

Nuclear

The French March ’17 index fell 19% month on month on the back of above-average temperatures in February, improved nuclear availability and the resulting easing of supply margins.

However, depleting hydro stocks as a result of subdued rainfall provided upside risk to a market still wary of further cold snaps.

The figure was the highest of any March index since 2012.

Germany recorded its highest March index since 2013, up 66% year on year supported by higher coal prices and the early winter spikes. The index dropped 10% month on month on expectations for milder temperatures and lower power demand in the region.

Volume was flat year on year, but down 34% month on month, suppressed by lower price volatility as the risk of price spikes dropped with forecasts for milder temperatures.

The UK March index was calculated 8% lower compared to February, reflecting the fact that risk premium gathered in the first few months of trading over the winter was sold out of the contract as it neared expiry. Milder weather and increased wind power in February pressured prompt prices, increasing confidence in supply for the month ahead.

However, the March index was still 56% higher than the 2016 equivalent, again highlighting the risk premium in the market earlier in the winter.

Hydro support

The Hungarian March’ 17 index was down a huge 22% month on month, a decline underpinned by an improving supply-demand balance after freezing temperatures caused havoc in the country earlier in the year. The March ’16 Baseload contract expired at €28.46/MWh, considerably below the index calculation.

But the index was still higher than March indices seen in previous years, as low reservoir stocks in the neighbouring Balkan region supported the near curve.

While France also contributed to a lower March ’17 index month on month in Italy, sluggish hydro generation, this time in the Alps, also contributed to the figure being the highest for a March in Italian power since 2014. Hydro power is the second largest source of electricity after gas-fired power in Italy.

Italian volume was the highest ever recorded on a front-month by ICIS in the country.

Month on month the index value was down, as higher temperatures capped power consumption in February, and limited demand for gas-fired power.

Volume struggle

The Czech March ‘17 index was up almost 65% compared to March ’16, tracking a similar increase in German power.

March volume was down 13% on a monthly basis and was down on a yearly basis too. As more cross-border capacity from Germany was offered for March, market participants lacked incentive to trade on the Czech market when they could trade the more liquid Germany.

Poland defied the annual pattern, with a flat year-on-year index calculation.

The March ’17 figure also recorded a small drop month on month. Sufficient availability from the country’s coal-fired power plants, import capacity from neighbouring countries as well as good wind generation put a lid on prompt prices during February. As a result, the March product lost value before expiry.

Traded volume for March ’17 totalled 128MW, down around 40% month on month, and plummeting 81% annually.

The Turkish index was valued at TL140.023/MWh, which delivery prices have been tracking since the beginning of the month. Traders had previously expected March to be priced stronger, at TL160.00/MWh, amid concerns regarding falling hydro output and bullish thermal production costs.

But day-ahead prices averaged TL143.34/MWh over last eight days ending Monday 6 March. Traders said the market was pressured by healthy hydro and wind production as well as softer demand.

Front-month liquidity improved in February compared to January, but was down 63% year on year. energyinfo@icis.com

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