Monthly electricity indices: April figures reflect continental divide driven by storage stocks

LONDON (ICIS)–Risk premium resulting from two late-winter cold snaps was evident in ICIS baseload indices for April ‘18 covering Europe’s largest power markets.

With gas storage stocks drained and hydro reserves low at least in northwest European markets, April indices were in one case almost flat to March as opposed to significantly lower, a very unusual occurrence.

Further southeast, a better stocked hydropower picture generally drove bigger discounts on April compared to March.

This defines the European fundamental picture going into summer: tighter and therefore relatively pricey in the northwest markets, largely due to low energy stocks; more relaxed across the southeast.

Longer-term, bullish carbon due to speculation on the back of market reform has been the key driver. All April indices were up year on year as a result.

April tightness

Both Germany and the UK recorded their highest April index since 2013.

The UK April index was at a mere 2% discount to March, highlighting the degree of risk premium that was traded into April Baseload ahead of its expiry. In contrast, the April index in 2017 held a 16% discount to March.

Cold snaps during the month of March this year helped increase bullish sentiment on the April products due to dwindling gas storage while medium-term forecasts indicating below-normal temperatures for the first half of April also pushed the contract higher.

Germany was up 15% year on year due to higher coal and carbon prices, but more relaxed than the UK compared to March on expected milder temperatures and lower power demand. Traded volume was the highest for an April index since 2011 and up 67% year on year. Slightly higher price volatility compared to the April ’17 as front-month contributed to the volume increase.

The French story was similarly bullish year-on-year. The French index was the highest for an April recorded by ICIS since 2015, but was down from March as mid-winter risk receded.

However cooler weather still boosted delivery in the spot market, lending support to the front month. Higher spot prices were also in part driven by elevated natural gas prices.

Although France has a low share of fossil fuelled power stations compared to Germany and UK, gas plants have accounted for a share of the power demand during peak hours in March. This explains support from carbon prices.

Extended outages for a number of power incumbent EDF’s nuclear units – including the 1.3GW Belleville 2 and 1.3GW Cattenom 1 nuclear units – brought expected nuclear availability for the start of April down from 52.5GW at the start of March to 50.9GW by the end of the month.
Hydro and hedging

Physical OTC hedging on Italy’s front-month dropped to the lowest in ICIS’ records in March, as a combination of forecast mild temperatures and expectations of strong hydropower production reduced the incentive to take a long position on the market. Just 82 physical trades were closed OTC for April ’18 Baseload – down from 592 for April ’17 and the lowest registered volume since ICIS started calculating the front-month index for the market in December 2010. Higher natural gas prices compared with 2017 fuelled a 19% year-on-year increase in the value of the index.

In Hungary Balkan hydro drove a different fundamental picture. The index was up compared to April ‘17 driven by a much stronger German market, but was down month on month and was one of the lowest monthly indices since April ‘17 because of extremely strong Balkan hydro.

Similarly the Czech monthly index for April was up year on year in line with stronger German prices compared to 2017, making April ’18 the strongest April index since 2013. But the index was down compared to March ‘18 as the region entered the second quarter, historically a time of lower demand compared to the winter.

The Polish monthly index was the strongest April index since 2011, according to ICIS data, and was the highest monthly index overall since July ’16. A stronger carbon market, as well as high prompt prices during March and poor wind forecast drove bullish expectations for April ’18 delivery. Poor power plant availability and low wind production ensured March delivered above the forward contract, feeding an outlook for a bullish April.

The Turkish index was 22% up on the April ’17 equivalent, the highest increase of Europe’s markets. Curve prices have risen, taking their cue from a bullish spot which had been lifted by rising buying interest from state companies. A total of 75MW of April’18 Baseload was traded over-the-counter, compared to 140MW over the same period last year. Compared to other months, liquidity has reduced amid high uncertainty over a rise in regulated electricity and gas tariffs to end consumers. energyinfo@icis.com