Lack of buyers weighs on German 2020 power contract
A lack of buying interest for long-term contracts has pulled the German 2020 base-load contract and corresponding clean dark spreads to record high discounts over the 2019 delivery year.
Market participants are eyeing a higher unhedged ratio of expected power production two years ahead compared with recent years which could provide future downside for the power contract, although the market has seemingly shrug off the potential for a fundamentally tighter German power system by 2020.
The German 2020 base-load contract ended yesterday' session at €40.85/MWh which was its highest close since assessments started in 2016, but at a contract-high discount to the 2019 contract which closed at €42.40/MWh, based on Argus assessments.
Clean dark spreads for base-load delivery in 2020 ended yesterday near an all-time low at €0.89/MWh for a 40pc-efficient coal-fired power plant which was €1/MWh below clean dark spreads for the 2019 delivery year. And while 2020 clean spark spreads for highly efficient 59pc gas-fired units are well above clean dark spreads for older coal plants, ending yesterday at €1.65/MWh, they have fallen from levels above €3/MWh as recently as 1 May.
Sellers
The 2020 outright power contract and corresponding clean dark spreads had held a premium to the 2019 delivery year in the fourth quarter of last year when German Chancellor Angela Merkel's CDU-CSU during the so–called Jamaica coalition talks with the FDP and the Green Party had offered to close up to 7GW of mostly lignite-fired capacity by 2020 in a concession to the latter. But the 2020 contract lost ground following the collapse of the talks which resulted in Merkel restoring her coalition with the SPD. The backwardation between the German 2020 and 2019 power contracts started to exceed the discount for equivalent products in the API 2 coal swaps markets in the first quarter against a backdrop of less active utility selling.
German utilities RWE, Uniper, and EnBW, as well as domestic nuclear generator PreussenElektra and Austria's Verbund all reported lower hedge ratios for their expected power generation two years ahead, now 2020, as of the end of the first quarter.
Depressed base-load clean dark and just clean spark spreads, with the latter only in positive territory for highly efficient units, is likely to continue to weigh on the appetite to sell 2020 power this quarter even as outright prices have continued to rise. RWE has adopted an implicit fuel hedge strategy for its German nuclear and lignite generation which means that the utility sells fuel rather than outright power, converting a long power position to a long spread position. The decline in clean dark spreads this quarter and RWE's expectations that 2020 clean dark spreads will eventually recover means the utility is keeping open position on the 2020 power contract, it said earlier this week.
Buyers
The absence of strong selling appetite from power generators has failed to support the German 2020 base-load contract. Buyers securing power for self-consumption or their large industrial consumers might hold back in locking in large volumes for 2020 as they expect outright prices to fall once utility hedging activity for their expected power generation steps up. And some might have bought 2020 power in the fourth quarter last year when the Jamaica talks had resulted in much larger gains for the 2020 contract compared with the 2019 delivery year even as there had been no details on whether the up to 7GW of lignite capacity offered to the Green Party would shut down entirely at the start of the decade or whether some closures could be implemented in 2019.
As of yet unhedged power on the buyer's side could prove to be a risky strategy. The German-Austrian day-ahead auction on the Paris-based Epex Spot exchange had settled at a discount to the average close of the calendar year during trading in the forward market the prior year in 2012 through to 2016. This encouraged market participants to buy their power needs closer to delivery given that short-term prices had delivered below the forward market. But the trend reversed in 2017 when the average German-Austrian base-load day-ahead settlement was €34.20/MWh, which was at a €7.60/MWh premium over the average close of the 2017 forward contract when it had been the year ahead in 2016.
The 2018 base-load contract last year closed at an average of €32.39/MWh, Argus data show. The German-Austrian day-ahead auction has settled at an average of €34.26/MWh so far this year and, taking into account yesterday's OTC market close for contracts delivering the remainder of this year, the market currently expects prices to average €39.63/MWh throughout 2018.
Rising costs for German coal and gas-fired generation have supported the upside in delivery so far this year compared with the year-ahead close in 2017. And buyers having yet to secure all of their power needs face exposure not only to the potential of continued strength in fuels and in the EU ETS market but also to a tightening German power system which could increase price volatility and increase the risk of buying larger volumes short term.
Standard deviation in the German intra-day market, also operated by Epex Spot, so far this year is just below last year's four-year high, based on the weighted average of concluded transactions for hourly products, and is above the average so far this decade, ahead of the second winter quarter of the year. Price volatility tends to be highest in the demand-intensive winter months.
Tighter market
German conventional capacity could be around 4-5GW lower in 2020 compared with 2019 based on current plant start-up and closure schedules. A total of 3.2GW of conventional capacity is to drop out of the wholesale power market in 2020. This includes the permanent legally-mandated closure of the 1.4GW Philippsburg 2 nuclear plant by 31 December 2019 under the German nuclear phase-out law while 757MW of capacity will join the German lignite reserve in October this year. The first delivery period of the 2GW capacity reserve is now set for October 2019-September 2021. Conventional power plants and demand-side management providers meeting the as of yet to be confirmed pre-qualification criteria will be allowed to participate in the German capacity reserve tender. The auction has the potential to take another 2GW of conventional plant capacity permanently out of the power market.
Other closures in 2019 are for commercial reason and most retirements are scheduled for the end of the first quarter.
There is limited potential for currently mothballed conventional power plants to return to the market in 2020. Two of the biggest units which are currently unavailable to the wholesale power market are the highly efficient Irsching unit 4 and 5 combined-cycle gas turbine (CCGT) power plants with a total capacity of 1.4GW . German utility Uniper has re-applied to mothball the units, which are part of the German grid reserve, from May 2019 and the CCGTs are likely to be again declared system relevant. System-relevant plants remain in the grid reserve for two years at a time.
This leaves Uniper's 1.1GW Datteln 4 coal-fired plant as the only conventional power plant scheduled to be commissioned in 2020. Uniper currently expects the plant to come on line in summer that year following lengthy delays.
Renewable generation capacity is expected to continue to rise in Germany but exports could step higher with the commissioning of new interconnectors. The 1GW Alegro interconnector between Germany and Belgium is scheduled to be commissioned in 2020. The Belgium 2020 base-load contract last changed hands in the over-the-counter (OTC) market on 16 May at around €43.60/MWh which was at a €3.35/MWh premium over its German equivalent, according to Argus data. This suggests that power flows would be mostly in the direction of Germany to Belgium. The 1.4GW Nordlink interconnector between Germany and Norway is expected to begin commercial operations in 2020, which could see stronger German imports from the Nordic region generally but is likely to limit downside on days with strong intermittent wind and solar power generation.
Related news posts
Colombia's electricity woes add to unrest against Petro
Colombia's electricity woes add to unrest against Petro
Bogota, 22 April (Argus) — Colombians took the streets of major cities and towns across the nation on Sunday to protest mainly against health, pension and labor changes, but potential power outages are also creating discontent. Authorities estimated that about 250,000 Colombians marched in widespread protests, sparked by changes in healthcare. Congress in April had rejected President Gustavo Petro's proposals in the sector, and the government the next day seized the two largest private-sector health insurers. Protesting healthcare workers say the government did this to implement changes through a back channel. "Regulatory noise and risk are likely to remain high amid announcements, proposals, and measures [that do not require congressional approval], aimed at changing the game's rules in strategic sectors," brokerage Credicorp Capital said. Colombians also protested being on the verge of electricity rationing like that in neighboring Ecuador as hydroelectric reservoirs remain at record-low levels. Several unions and other associations have long warned the Petro administration to take measures to offset the effects of the El Nino weather phenomenon. Electricity distributors last year called for allowing bills for energy purchased on the spot market to be deferred and for loosening price index rules, among other proposals. The national business council sent at least three letters to the president on the issue. At least nine separate letters calling for preparation to prevent blackouts were sent to the president and ministers. Several actions were only recently implemented . "There are no risk of electricity rationing in Colombia," former energy minister Irene Velez said in 2023. "We do not understand why some people are interested in generating panic." Government weather forecasts also overestimated rainfall expected for March, leading hydroelectric plants to use more water in the reservoirs than they otherwise would have, said director of the thermoelectric generation association (Andeg) Alejandro Castaneda. Reservoir levels stood at 29.5pc today, rising thanks to rains since 19 April, up from 28.75pc on 18 April. Electricity rationing is set to begin when reservoirs drop below 27pc, according to grid operator XM. By Diana Delgado Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
TotalEnergies takes FID for Oman's Marsa LNG
TotalEnergies takes FID for Oman's Marsa LNG
Dubai, 22 April (Argus) — TotalEnergies has taken a final investment decision (FID) for the integrated Marsa LNG bunkering project it is carrying out in Oman with state oil company OQ. The project involves the production of 150mn ft³/d (1.55bn m³/yr) of gas from Oman's onshore block 10, the liquefaction of that gas at a new 1mn t/yr capacity plant to be built at the port of Sohar on Oman's north coast, and the construction of a 300MW solar generation facility that will power the plant. The ambition of the project is to serve as the first LNG bunkering hub in the Mideast Gulf region, showcasing "an available and competitive alternative marine fuel" to reduce emissions coming from the shipping industry. TotalEnergies said today that it expects to begin producing LNG by the first quarter of 2028. That LNG is "primarily intended to serve the marine fuel market in the Gulf", the company said, but all LNG quantities not sold as bunker fuel will be off-taken by TotalEnergies and OQ. "We are proud to open a new chapter in our history in the sultanate of Oman with the launch of the Marsa LNG project, together with OQ," TotalEnergies chief executive Patrick Pouyanne said. TotalEnergies holds a majority 80pc stake in the joint venture, with OQ holding the remaining 20pc. "We are especially pleased to deploy the two pillars of our transition strategy, LNG and renewables, and thus support the sultanate on a new scale in the sustainable development of its energy resources," Pouyanne said. TotalEnergies, Shell and OQ formalised an agreement to develop the gas resources in Oman's block 10 in late 2021 . The consortium began producing gas from the Mabrouk North East field in block 10 in January 2023. At the time, the companies said they expected to reach plateau production of 500mn ft³/d by the middle of 2024. But TotalEnergies today said the consortium had already reached plateau this month. As part of the original agreement, Marsa LNG was due to deliver production from the block to the government for 18 years, or until the end of 2039. But the decision by TotalEnergies and OQ to take FID has triggered an extension of Marsa LNG's rights to block 10 until 2050. The planned 300MW photovoltaic solar plant should cover 100pc of the LNG plant's annual power consumption, which will help "significantly" reduce greenhouse gases. "By paving the way for making the next generation of very low-emission LNG plants, Marsa LNG is contributing to making gas a long-term transition energy," Pouyanne said. By Nader Itayim Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Australia to launch 6GW renewables tender in May
Australia to launch 6GW renewables tender in May
Sydney, 22 April (Argus) — Australia's federal government plans to launch the country's largest ever tender for renewable energy in May, with more than a third of the capacity to be allocated to New South Wales (NSW) state. The first major tender under the federal government's expanded Capacity Investment Scheme (CIS) will offer support for 6GW of renewable generation capacity, with at least 2.2GW of the total set specifically to NSW, the federal and state governments said in a joint statement on 22 April. A market briefing outlining the tender process will be released in early May. A minimum of 300MW will also be exclusively allocated to projects in South Australia (SA), even though that is still subject to a final agreement between the federal and state governments. The remaining capacity will be allocated across the National Electricity Market, which apart from NSW and SA also includes Queensland, Victoria, Tasmania and the Australian Capital Territory. Tenders will run every six months until 2026-27 under the expanded CIS, with up to 15 years of support for a total of 32GW . This will consist of 23GW of renewable capacity like solar, wind and hydro and 9GW of dispatchable capacity such as pumped hydro and grid-scale batteries with at least two hours of dispatch. The inclusion of generation projects in NSW in the first CIS tender will replace the state's scheduled long-term energy service agreements (LTESA) tender under its NSW Roadmap. NSW will proceed though with the LTESA tender for long-duration storage infrastructure in the second quarter of 2024, as well as processes to award access rights for its Central West Orana and South West Renewable Energy Zones. The federal government also said it plans to launch a separate tender in Western Australia in mid-2024 targeting 500MW of dispatchable capacity. By Juan Weik Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Japan's Jera shuts Chiba gas-fired power unit
Japan's Jera shuts Chiba gas-fired power unit
Tokyo, 22 April (Argus) — Japan's largest electricity producer by capacity Jera has shut the 360MW No.1-4 combined cycle gas turbine (CCGT) units at its Chiba power complex because of a technical problem. Jera closed on 22 April the CCGT units at the 4.38GW Chiba complex in east Japan's Chiba prefecture, according to a notice by Japan Electric Power Exchange (Jepx). It is unclear when the units will be brought back on line. The unexpected shutdown is likely to have limited impact on Japan's power market as the country has experienced mild weather lately that has capped power consumption. Jera consumed 16.7mn t of LNG in April-December 2023, lower by 4.8pc compared with the same period a year earlier, according to the firm's latest financial results. Japan's total power demand averaged 83GW during 15-21 April, down by 3pc from the previous week, data show from nationwide transmission system operator the Organisation for Cross-regional Co-ordination of Transmission Operators. Japan plans to add 1.1GW of thermal capacity during the week to 28 April, with the addition of 11.5GW outstripping the closure of 10.4GW, according to Argus' survey based on a Jepx notice. The difference incorporates the net increase this week in gas-fired capacity of 2GW and the net drop in coal-fired capacity of 887MW. By Reina Maeda Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Business intelligence reports
Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.
Learn more