Risk premium directly linked to low hydropower stocks was priced into front month electricity contracts across most of Europe during April with the summer heat fast approaching, boosting ICIS’s trade-based monthly index values for May ‘17.
Only the UK, which is less exposed to fluctuations in hydropower stocks than mainland European markets, recorded a month-on-month index decline.
The central and eastern Europe region led the way in terms of price increases, with spiky spot prices also weighing in. Germany, Hungary and Czech Republic indices were all up from April by an average of 8%.
In Germany a spiky spot price led traders to limit any short positions on the front month, particularly in the first week of April when May ’17 Baseload gained almost 10% in value. To illustrate the prompt risk in Europe’s largest power market, ICIS German day-ahead baseload index averaged €34.129/MWh in April, up 31% from the equivalent figure in 2016.
In Hungary, power prices were also boosted by low wind output in neighbouring Romania and below-average regional temperatures. Improved precipitation towards the end of the month failed to boost hydro stocks, which have been low since the beginning of the year. Partly reflecting this, April prompt deliveries averaged €43.11/MWh, significantly above the €30.31/MWh average delivery price in April 2016, ICIS data showed.
The Czech May ’17 index gained strongly compared to the previous year, taking its cue mainly from the German equivalent. Upside in the nearby Hungarian market provided some risk premium in the Czech Republic, which is connected to Hungary via Slovakia.
All other markets bar the UK also recorded month-on-month increases, although hydro-related risk premiums were less pronounced.
The French and Italian indices were both around 5% stronger month on month. France remained well above the equivalent last year – a 45% premium in fact – with this year also held up in part by depleted hydro stocks, a shortfall which gas-fired plants to a large extent have been making up for.
In Italy, May ’17 was the seventh front-month product in a row to record a year-on-year index increase. Lack of hydro reserves and expectations of higher prices than usual because of maintenance cutting internal transmission lines supported the price. Market participants, especially suppliers with a natural short position, had a greater incentive to hedge their energy needs than in 2016, causing volume to rise.
In the UK, power prices edged lower during the first half of the month, but were largely flat during the final two weeks, with range-bound wholesale gas prices failing to offer the electricity market firm direction. Prices continued to hold firm relative to last year, with the May ’17 index valued 26% higher than the May ’16 equivalent. Volume crashed, with 71% less front-month trade year on year.
The Polish May ’17 index rose despite a relatively low spot delivery throughout April. The contract was also quite illiquid with only 50MW changing hands compared to 532MW on the equivalent last year. May ’17 was however expected to deliver below its average closing assessment amid forecasts for low demand and good power plant availability.
Liquidity on the Turkish front month halved, as only 70MW of physical deals changed hands in April, compared to 140MW for the April ’17 product the previous month. The index out-turned a little higher than the last assessed ICIS forward price for the month. Values were pushed up by expectations of low hydro output and reduced production from imported coal linked to soaring costs for the fuel. Uncertainty over fuel availability hobbled liquidity as fewer companies ventured to take positions. firstname.lastname@example.org