French power near-curve 'overvalued' on heatwave fears

26 May 2017 05:08 Source:ICIS

Soaring French power prices caused by medium-term forecasts of hot weather in June and July will be followed by corrections if temperatures turn out lower than forecast.

This is because of a degree of disconnect between the unfolding fundamental picture and forward prices, a number of French power traders have said.

Therefore selling the front month and buying back in delivery is an option for participants that have confidence in the French nuclear and hydro supply systems.

Buying spree

Some market participants went on a buying spree this week to guard against price spikes in the summer months after weather forecaster WSI on Monday projected above-average temperatures in northwest Europe in June and July – and between 5-6°C above the norm for the last days of May.

The June ’17 Baseload contract subsequently jumped 7% from Friday last week to Wednesday 24 May – the highest price of a front-month contract since the first day of March, ICIS data showed.

The strong buying interest came amid concern about power incumbent EDF’s actual nuclear supply this summer, as well as a lack of sufficient snow in the Alps to feed melting water into reservoirs during the ongoing infill season.

French hydropower can be particularly important during heatwaves when nuclear plants are more likely to go offline due to evaporation in rivers, as operations rely on sufficient water levels.


But several traders said the price spikes were not entirely rooted in fundamentals:

“I’m not so convinced this price would materialise [in delivery]. With the nuclear forecasts we see in France now for next month, it seems like June ’17 is overvalued,” one trader at a medium-sized utility in central Europe said. “But it could be that participants expect [forward] prices to go up further.”

However on Thursday afternoon, there were already signs of weakness on the back of cooler temperatures next week, with one over-the-counter June ’17 trade changing hands flat to Monday’s close.

Another head of trading at a trading house in northwest Europe agreed that June ‘17 was overdone: “It’s just a risk premium. Hydro stocks aren’t that bad, and the consumption is not there to support these prices,” he said. But he added that if weather stays dry in the coming weeks, there could be a snowball effect with prices again going up.

When French national average temperatures exceed 24°C, there is an exponential relationship between daily temperature and power prices, ICIS analysis recently showed ( see EDEM 12 May 2017 ).

Bullish waves

Concern of a tight French power market has sent bullish waves to neighbouring countries, such as Germany, Belgium and the Netherlands, which form the alliance of countries integrated in the day-ahead flow-based market coupling system. But also Spain and Italy, both reliant on France for power imports during the summer, have seen equivalent contracts soar in line with France.

However, trader memories are still fresh of the French nuclear crunch which erupted in September 2016 – causing up to a third of incumbent EDF’s nuclear fleet to be offline – and more recently, historically tight supply margins in January which resulted in high intra-day and balancing prices.

“So many people got burnt,” one former intra-day trader at a large energy company said, who is no longer trading in the French power market.


Jitters have returned this week, as EDF on Tuesday reduced its nuclear plant availability over the next few months. On Thursday, availability plummeted to 38.6GW – a multi-year low – corresponding to 61% of the company’s installed nuclear production. Plant availability is scheduled to drop further over the weekend before improving steadily from 1 June.

However, the sudden drops this week could well push risk-averse traders to lock in positions for the summer. As opposed to previous, more optimistic forecasts earlier this year, nuclear availability in July is scheduled to be below 2014 and 2015, but above 2016, data from French grid operator RTE showed.

On Wednesday afternoon, the 880MW Fessenheim 2 nuclear unit – one of France’s oldest reactors and offline since June 2016 – was pushed back for restart from 31 July to 31 October. The plant is under investigation for anomalies in the steam reactor, and the restart has been delayed repeatedly.

By Herman Moestue