Czech-German June power spread to persist or increase pre-expiry

The current premium of the Czech June ’17 electricity baseload contract over its German counterpart could persist or even widen before expiry, due to nuclear maintenance and support from coupled markets.

The Czech front month is valued above the German product despite weekday day-ahead prices on the Czech market averaging just a €0.06/MWh premium to Germany since the beginning of April.

But uncertainty over import capacity during June, along with overlapping Czech outages and bullish June prices in Hungary, mean the contract could be undervalued at present.

Reduced production

Czech nuclear plants Temelin and Dukovany comprise 4GW of generation capacity, around 20% of the country’s total installed capacity.

At present, one 500MW unit is in outage, taking nuclear generation capacity down to 3.5GW, but in June, 1.5GW will be in maintenance, cutting nuclear generation to 2.5GW.

“I think the [Czech premium] is justified, with Temelin going out, you can’t expect the Czech market to follow Germany on the days when Germany goes low,” said one market participant.

Coupled markets

Czech June could also be supported via the market coupling with Slovakia, Hungary and Romania.

Persistently low hydro generation in the region is causing uncertainty for the Hungarian and Romanian June products. The Hungarian front month hit a three year high for a June product on 2 May amid this uncertainty and regional outages ( see EDEM 02 May 2017 ).

The Czech Republic is connected to Hungary via Slovakia. Higher prices in Hungary could prompt greater flows from Slovakia to Hungary and raise Slovak prices, which could in turn prompt higher Czech exports to Slovakia and raise Czech prices.

The Slovak June traded at a €1.90/MWh premium to the Czech contract on 9 May, signalling there could be upside potential on the Czech front month, as the two markets often converge in delivery.

“There is space up to Hungarian prices,” said a third trader. “We could see a higher [Czech June] price especially because Slovak [June ‘17] is at €33.25/MWh at the moment.”

Uncertain import capacity

A risk factor for the Czech front month is the amount of import capacity available from Germany.

A fourth market source pointed out that lower Czech production could reduce grid resistance. Electricity takes the path of least resistance and poor transmission capacity from wind farms in North Germany to consumption centres in the south sometimes causes loop flows through the Czech grid ( see EDEM 13 March 2017 ).

Grid operators sometimes cut cross-border capacity for commercial use and reserve some capacity to balance the grid.

Phase shifting transformers installed on the Czech-German border should combat loop flows, but Czech grid operator CEPS has only been able to launch two of four phase shifters. The final two are expected by the end of June.

With the phase shifters a recent addition to the arsenal against loop flows, CEPS may still wish to reserve some capacity in June.

“Who knows how the TSOs will behave,” said the trader.

“If the cross border capacity is the same as it is now, then this spread should be narrower. If it is lower, it could even be wider.”

Conclusion

Czech May weekdays delivered at an average premium €0.15/MWh to Germany so far, a substantial increase compared to the €0.03/MWh premium on April delivery.

It looks as if the situation will only get tighter in June. Demand is likely to increase in line with temperatures as air conditioning use increases and nuclear maintenance will cut supply dramatically.

Market participants must weigh up whether the Czech June price could collapse under an improvement in Balkan hydropower or good availability of import capacity to the Czech Republic. ellie.chambers@icis.com