German power price jump could extend into 2019

Bloomberg

The record jump in prices in Europe’s biggest power market could extend well into 2019. Booming European carbon futures, Germany’s plan to shut some of its dirtiest plants, and low water levels after an extremely dry summer are all factors driving the region’s electricity prices. While 2018’s surge probably won’t be repeated, Wood McKenzie Ltd says average rates for the benchmark contract could rise about 16 percent in 2019.
Further gains would hurt industry, households and stoke inflation. But they could also push some utility stocks to outperform in 2019. Although Europe’s main utilities index is down 2.2 percent in 2018, among the winners are fossil-free power producers Verbund AG and Electricite de France SA.
“We are in a new order with higher carbon prices, which was always part of the broader European strategy,” said Bruno Brunetti, managing director of global power at S&P Global Platts. “High carbon prices mean more renewables and lower coal capacity going forward.”
Much of the benchmark’s 49 percent gain was driven by soaring carbon costs, on course for their biggest annual advance in more than a decade.
That was the “biggest change we’ve seen in 2018 and power prices have followed,” said Peter Osbaldstone, research director for European Power at Wood Mackenzie. The year-ahead contract in Germany could average just below 50 euros ($57) a megawatt-hour in 2019, he said. That compares with about 43 euros in 2018.
That might be the end of the rally, since the consultant sees rates decline in 2020, tracking lower gas prices. “We see slightly weaker gas prices in 2020 and that feeds into power,” he said. As the biggest and most central of Europe’s market, what happens in Germany will continue to impact other
regions too. So far in 2018, Nordic prices have gained 41 percent, while French rates are up 47 percent.

CARBON MARKET
The close link between carbon and power will continue. A mechanism to reduce the surplus of permits, known as the Market Stability Reserve, starts on January 1 and the expectation of tighter supply has been the main guide in 2018.
Forecasts vary wildly. While some, including German bank Berenberg, are seeing futures almost doubling to 45 euros a ton, others, like Aurora Energy Research Ltd., are expecting little changed prices trading in the high teens or low twenties.
“The uncertainties for carbon are huge, because a lot depends on the behavior of financial investors who moved into the market in 2017,” said Hanns Koenig, project leader at Aurora in Berlin. “Nothing is ever off the table, but we’re more in a world now where 20 euros is a pretty good benchmark.”

COAL’S FUTURE IN GERMANY
The nation’s Coal Commission will in early February publish a timetable for exiting the world’s most widely used power-plant fuel. Berenberg says the group could call for as much as 10 gigawatts of closures by 2022, including some plants burning lignite, the dirtiest kind. Operators of such facilities, like RWE AG, are likely to seek compensation if they are forced to shut units. Nuclear-plant owners are already receiving payments for halting reactors in advance as part of the atomic exit by 2022.
Closures of coal plants on top of the halted reactors could impact as much as 26 gigawatts of capacity, Berenberg estimates. This will increase the pressure on power supplies, particularly at times of high demand, or when renewables output is low.
“We are definitely going into a tighter market which will create more volatility for power prices,” Aurora’s Koenig said.

DRY WEATHER
Germany has experienced its hottest and driest weather in more than a century, according to provisional data from Deutscher Wetterdienst. Low river levels have stopped barges from bringing coal supplies to power stations and also forced EDF to cut production at some nuclear stations in France to avoid overheating. Without any significant rainfall seen before May, there’s the potential that rivers, lakes and groundwater levels won’t recover from the droughts of 2018 and dry spells next summer could be even more severe.
“This is something power traders will be looking at because it increases the chance of a tight power system and the risk of price spikes,” said Neil Cornelius, managing director at industry consultant Berkeley Research Group LLC. “It’s an issue that can affect major nuclear and conventional power stations that are inland and cooled by river water.”