German August power nears 4Q prices

German base-load prices for August delivery are close to contracts delivering in the more demand-intensive winter period as market participants have priced in the risk that lower wind power generation will increase the call on fossil-fuel units to meet domestic demand and will create exports opportunities as grid bottlenecks ease.

An outlook of above-average temperatures, which led to minor capacity reductions at thermal plants this week, is to last until at least the beginning of August and forecasts for river levels to fall further have also contributed to upside pressure on the August contract after a similar weather pattern combined with a rise of marginal costs for power sector coal to buoy German-Austrian day-ahead prices so far this month.

The August contract closed at €50.90/MWh in today's session which was just €0.20/MWh below the close for the fourth quarter 2018 contract, Argus data show. Clean dark spreads for 38pc-efficient coal units ended the previous session at a fresh all-time high of €3.83/MWh. This was still below fourth-quarter 2018 clean dark spreads at €5.55/MWh partly because coal-to-gas competition in summer is stronger compared with the winter months when demand for heating is higher. Clean spark spreads for 55pc-efficient gas plants ended yesterday at €4.82/MWh, compared with €4.33/MWh for delivery in October-December. The rise in clean dark and spark spreads to fresh contract highs for delivery next month reflect expectations that domestic and cross-border power demand will remain firm and continue to support the call on German fossil fuel units.

A typical fall in industrial consumption tends to weigh on German prices for delivery in August. Average German-Austrian day-ahead prices for the month of August have settled close to or above the average for delivery in the usually more demand-intensive period of October-December only twice so far this decade in 2012 and in 2013. Mean temperatures on August 2012 were 1.8°C above the long-term average, while in August 2013 average temperatures throughout the month were 1.5°C above the seasonal norm after reaching up to 38.4°C in central west Germany at the start of that month. Mean temperatures in the central west German city of Duesseldorf today were forecast to stand at 22.8-24.12°C on 1-3 August, which is around 3-5°C above the long-term average. And daily highs were expected to hover around 30°C at the start of next month.

The recent weather conditions of above-average temperatures have been accompanied by low winds. Daily German wind power generation has averaged 6.8GW so far this month compared with 8.1GW in June and compared with 7.5GW throughout July last year. Solar power generation has been higher to average 9.6GW on 1-19 July which is the highest monthly average on record. But while solar power generation could limit the rise in peak-load day-ahead prices so far this month has prevented an even sharper rise in fossil-fuel generation compared with levels earlier this summer, off-peak prices, which covers hours 0-8 and hours 21-24, have been rising to an average of €47.09/MWh so far this month in the German-Austrian day-ahead auction on the Paris-based Epex Spot exchange. This puts July off-peak prices on track to settle at the highest level for any month since May 2011, when they settled at an average of €52.15/MWh. German-Austrian off-peak prices so far this month are closely in line with average marginal break-even costs of €47.02/MWh for a 38pc-efficient coal plant and are slightly above marginal costs for operating a 55pc-efficient gas-fired unit in the NCG gas hub area.

Modest wind generation has also supported Germany's export opportunities in market coupling schemes so far this month compared with wind-intensive periods. Strong winds often force German transmission system operators (TSOs) to limit the amount of capacity they make available in day-ahead market coupling for cross-border trade because of internal grid bottlenecks between wind-intensive north Germany and south German demand hubs. The internal bottlenecks cause loop flows through neighboring grids, leading to grid congestion in the wider region and lower availability of inter connector capacity for commercial trade. The German-Austrian day-ahead base-load settled at an average of €48/MWh so far this month which was €4.14/MWh below the Dutch market, marking the lowest discount so far this year. German-Dutch net allocations in the CWE flow-based day-ahead market coupling scheme have remained firm at 1.9GW compared with 1.5GW on average in the first quarter when German wind power generation was much higher, at a daily average of 15.4GW. While lower German-French allocations in the day-ahead coupling have helped to facilitate higher German-Dutch flows, falling wind power output has contributed to that trend.

The August off-peak contract, including morning and evening off-peak hours, did not attract trading interest today but changed hands twice at €46.25/MWh yesterday, which is around the break-even costs of 39pc-efficient coal and 55pc-efficient gas plants as the market priced in expectations that the current weather pattern will last into next month and will continue to support the call on German coal and gas-fired to meet domestic and cross-border demand.

Plant restrictions, barging

Forecasts for temperatures to remain above average could also increase thermal plant curtailments and increase barging costs for coal plants, adding support to the August contract relative to the fourth quarter.

Above-average temperatures have so far led to only limited capacity curtailments at thermal plants in Germany and in neighbouring countries. German utility EnBW is curtailing output at its 517MW RDK 7 hard coal-fired unit by 50MW because of external reasons until at least 29 July. High temperatures have also led to minor capacity curtailments at gas-fired units, including a 17MW reduction at the 887MW Emsland D plant, operated by domestic utility RWE. And the 1.4GW Brokdorf reactor is scheduled to reduce output until the morning of 22 July by 120MW which includes a 40MW because of rising water temperatures at the river Elbe.

Capacity curtailments could increase should the weather forecasts for Germany and the wider central west European region prove to be correct. Several rivers could heat up quicker than usual as water levels have been falling from the recent lack of rainfall. At the south German Kaub measuring point on the river Rhine, water levels today stand at 106cm and are forecast to fall as low as 101cm by midday on Monday, 23 July, which would be the lowest level since the beginning of last year. The low Rhine levels is increasing barging rates for coal-fired power plants in central west and south Germany as they now stand well below the 180-200cm threshold at which barges can load at 100pc of capacity.