Concerns over a potential supply-demand imbalance in France in the fourth quarter have pushed the physically delivered contract to an unusual premium to the financially settled derivative.
The spread between the fourth-quarter physical and financial products widened sharply from an average of €1.40/MWh on 11 May to €1.69/MWh on 18 May. The physical product traded at an average of €59.71/MWh from 1-24 June — at an average premium of €1.13/MWh to the financial equivalent. Physical trades totalled 1.08GW, compared with financial volumes of 2.13GW on the EEX exchange.
French 4Q20 physical and financial prices, Monthly average €/MWh
A physical contract for electricity is a negotiated contract between a seller and a buyer in the over-the-counter (OTC) market. There is a range of different physical contracts for 15-minute delivery, hourly, spot, long-term or forward. Since electricity cannot be stored, this range of contracts is necessary to maintain supply-demand balance.
Derivative contracts are used in European power exchanges. The value of a derivative will vary based on the changes in the price of the underlying power product. Companies that consume and produce energy use energy derivatives to help hedge against marketplace risks.
In France, the physical contract has opened a premium because of concerns that demand will far exceed supply on the day-ahead market in the fourth quarter, pushing up power prices, which are capped at €3,000/MWh on the day-ahead exchange. If this happens, individual physical fulfilment orders will be treated the same way as a linear order and curtailed if the market is not liquid enough, Epex Spot said. A curtailment does not mean a “blackout scenario”, it said.
Supply concerns have been stoked by extended nuclear maintenance scheduled for the fourth quarter. In mid-April, France’s EdF reduced its 2020 nuclear output guidance to 300TWh to reflect the Covid-19 crisis and resulting drop in power demand. It then changed its nuclear maintenance schedule in late April — this shows that 19.4GW is expected to be off line in October-December.
But historical data show that during winter 2016-17, when nuclear unavailability averaged over 20GW, day-ahead hourly prices peaked at €874/MWh for delivery on hour 19 on 7 November 2016.
The spread between the first-quarter 2021 physical and financial contracts has averaged €0.54/MWh so far this month. But the physical premium closed at €1.27/MWh on 24 June. French nuclear unavailability is scheduled to average 11.7GW during the period.
Increasing volatility has also spurred trading interest in French derivative power contracts. Traded derivative volumes totalled 53.82TWh last month, up by 161pc on the year, EEX data show. By comparison, derivative trading across Europe rose by 17pc to 315.55TWh.Interest in French financial contracts has grown since March, following EdF’s announcement that it expects its domestic nuclear generation to reach 375-390TWh this year, lower than levels in the last two decades. This estimate was revised down further to 300TWh in April.
French derivative power volumes, TWh
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