• Traders hold back from pricing a prompt market adjustment into the forward curve for complexity reasons
• The change will mean narrower price spreads in northwest Europe, particularly over winter months
• Traders should follow FBMC auction results closely, because the material impact of the change will first be visible in day-ahead spreads going into May
• Price signals will then firm in the autumn as colder weather arrives
LONDON (ICIS)--Power traders are reluctant to bet on narrower winter price spreads on the forward curves of centralwest European markets.
This is despite looming adjustments to the day-ahead flow-based market coupling (FBMC) model, due to take effect by the end of April, which are expected to result in narrower price spreads over the winter months in particular.
The reluctance to act now on the forward curve is because the complexity of the FBMC system makes predictions about future price outcomes difficult, particularly as these will also be influenced by other changes to the flow-based system in coming months.
Transmission system operators (TSOs) said on 5 April they will incorporate a minimum available commercial cross-border transmission capacity requirement into the FBMC model. According to their impact assessment , the change will lower French and Belgian prices while raising German prices, particularly in the winter.
The change should therefore mean narrower locational spreads between winter forward contracts in the FBMC region after it has gone live, a trader at a German utility said. But, he added, he did not intend to take short or long positions based on this yet. “I wouldn’t buy German winter [contracts] only because of this,” he said.
While it seems logical that the change will narrow spreads, it is too early to form a view on how exactly these will be affected, one trader at an international energy company said.
No curve impact yet
The planned change appears to have had no impact on winter forward products so far. The German Q4 ’18 discount to the equivalent French contract was €10.50/MWh on Monday, up just €0.03/MWh from 4 April.
The German-Belgian Q4 ‘18 spread has also hardly changed in this period. Both coal and carbon futures, the main drivers of the German power curve, and gas prices, which often drive French and Belgian forwards, have moved up.
The lack of impact could be due in part to some market participants not being aware of the change yet, but also stems from the cautious approach traders have regarding FBMC. Since its introduction in 2015, the advanced market coupling methodology has always brought some unexpected day-ahead price outturns, the second trader said.
“Traders are very sceptical and risk-averse in taking positions based on PTDF scenarios [which indicate congestion-driven cross-border restrictions in the FBMC model], as the methodology is considered a black-box,” one analyst at an international commodity company said.
TSOs will publish more detailed results of their impact assessment before 24 April, a spokeswoman for French grid operator RTE said on Monday. This is unlikely to reduce uncertainty to the extent that market participants would change their wait-and-see approach, trader commentary indicates.
Forecasting future price spreads in the FBMC region is tricky for various reasons:
• TSOs retain the right not to apply the planned change on certain power lines if this endangers supply security
• The impact assessment TSOs presented is for the period September 2016 to November 2017, a time when French nuclear plant availability tended to be unusually low
• The split of the German-Austrian bidding zone, due on 1 October following a parallel run from 1 July, will mean additional changes to the FBMC model
• The commissioning of the Doetinchem-Wesel interconnector in the second half of this year is due to increase German-Dutch transmission capacity by at least 1.1GW, which will affect trade opportunities on other FBMC borders as the methodology optimises commercial flows on a region-wide basis, as opposed to bilaterally.
In light of how the situation is developing, it makes sense for curve traders to follow FBMC auction results closely over coming months, because the material impact of the upcoming changes will first be visible in day-ahead price spreads going into May.
This impact could then feed into winter forward contract spreads particularly over autumn, as it becomes clearer what the combined impact of the changes will be over the colder months. firstname.lastname@example.org