French power far-curve premium over Belgium to remain amid nuclear doubt – traders

A growing risk premium on French calendar year contracts over the Belgian power market is likely to remain until traders’ concerns over the reliability of EDF’s nuclear forecasts are laid to rest.

The price premium between the two power markets flipped in mid-October last year when power incumbent EDF revised down its nuclear output targets for the rest of that year following a probe by the French nuclear safety authority into 12 reactor units.

But since ASN ended the investigation on 24 February this year after approving the last nuclear unit for restart, the French Cal ’18, ’19 and ’20 have retained a premium over Belgium.

Consensus

There are several factors driving the French premium, with consensus behind the first:

• Traders lack confidence in nuclear generator EDF’s output forecasts, which adds a risk premium to calendar year products on the forward curve (see EDEM 22 February 2017).

Besides this, other factors at play include:

• Uncertainty about French nuclear safety authority ASN’s decisions regarding the lifetime of the oldest nuclear units in France

• Further uncertainty over the next French president’s energy policy. The first round of polling takes place on 23 April

• Increased costs for nuclear plants, such as higher operating expenditure, maintenance costs and safety investments, highlighted by the French Cour des Comptes, or Court of Audit

• Sluggish liquidity on the French and Belgian far curves which may yield more volatility and poor price signals that do not reflect fundamentals as well as more liquid markets would, although this could mean products are underpriced as well as overpriced.

“The premium is likely related to EDF’s forecasts of nuclear availability and actual delivery,” one utility-based trader in north Europe said. “Delivery has been below the forecasts in previous years and until that is resolved, the market is going to price in a premium.”

Another trader based in France said: “I have some doubts EDF will be able to generate nuclear [power] at levels similar to 2014-15, mainly due to technical issues.”

For its part, EDF has published year-ahead output targets that it says “take into account” previous issues including “controls and investigations” related to its nuclear fleet.

Premium

ICIS does not assess Belgian wholesale power prices on a daily basis, but collects and publishes over-the-counter trade data whenever transactions are reported. By comparing trades occurring on the same date, the French Cal ’19 Baseload has been on average 10.5% above the Belgian equivalent in the period 26 January-9 March.

And an even higher premium applied to Cal’ 20. The French Cal ’20 Baseload stood at a 17% premium to the Belgian Cal ’20, which has only traded three times this year, on 2 March. While the French Cal ’20 changed hands at €37.10/MWh, the Belgian equivalent traded at €31.70/MWh – a difference of €5.40/MWh.

French forward curve power prices have historically been cheaper than Belgium, particularly in 2015 when two of Belgium’s seven nuclear units – the 1GW Doel 3 and Tihange 2 – were forced to go offline for safety reasons, causing serious fears about a supply crunch in Belgium during the winter.

But the Belgian plants were approved in November 2015 to continue operations, and the concern has since shifted to the state of the French nuclear fleet and owner EDF’s output forecasts, several traders told ICIS.

Only in 2016 did the average French front-year price push above Belgium, mainly because of the increases in France in the latter half of the year.

Nuclear output

According to a plan published by the French energy ministry in summer 2016, annual nuclear generation is likely to drop by 10-65TWh in the period 2019-2023 from around 415TWh in 2015, depending on various factors such as the closure of the two 900MW Fessenheim reactors in 2018.

More than half of total French nuclear capacity will reach 40 years of service by 2025 and extensions of at least part of the nuclear fleet will be necessary to guarantee security of supply. The number of units subject to ASN’s 10-year inspections is expected to jump from four in 2018 to seven in 2019 and 2020.

However, two traders refuted the idea that a reduction in nuclear power was fuelling higher price premiums on the far curve, because this was already known to the market before October 2016 when the French premium to Belgium began to surge.

Some traders doubted that the premium will tail off in the medium- or long-term, even if the problem of unpredictable nuclear forecasts is solved.

“That’s the million dollar question,” one trader said. “Despite the green light from the ASN regarding concerns on steam generators, there are a lot of uncertainties regarding future nuclear availability in France.

“When it comes to policy, this would need an update post-French presidential election.” herman.moestue@icis.com