European power market volatility could persist

Price volatility for longer-term products in European wholesale power markets may remain at a high level because of uncertainties over the global macroeconomic picture and national energy policies.

And additional thermal power plant closures in Europe, combined with volatility in fuel prices which determine the cost of marginal power generation in Europe, are likely to support a further rise in volatility in short-term power markets.

Intra-day price swings in European wholesale power trading rose last year after a period of low price volatility earlier this decade had contributed to the exit from proprietary trading by several financial players, including some of Europe's largest banks.

A volatile EU emissions trading system (EU ETS) market caused some of these price swings in wholesale power trading. But an uncertain macroeconomic picture contributed to price volatility in European power markets, Swiss utility Axpo's head of trading and sales Domenico De Luca said at the E-World conference this month.

The continuous news flow from political uncertainties such as the ongoing Brexit negotiations, rumours from the coal commission with various phase-out scenarios, and uncertainty over potential OPEC oil production cuts and US foreign policy have all contributed to a volatile European power market environment, chief commercial officer of Germany's RWE Supply and Trading Peter Krembel said.

Power plant operators can extract additional value from their units by taking advantage of price volatility based on fundamental analysis of global energy markets. "But news-driven ad hoc volatility from the political or regulatory side is unpredictable and does not make the task easier," Krembel said in Essen last week. And for now there are few signs that political uncertainties are easing, he said.

Adding to that are changing weather patterns, member of the executive board and head of Swiss energy company Alpiq's digital and commerce division Markus Brokhof said at the E-World Conference. Weather conditions have generally become more extreme, as reflected in longer periods of very dry or very wet conditions, Brokhof said.

European merit order set on global stage

The global macroeconomic picture is exerting a strong influence on the merit order in European power markets. Given that prices for commodities such as coal and gas are set on a global level, European power markets are exposed to energy policy decisions made elsewhere. The pace of the switch to gas heating in China is one example given that this determines the country's import needs for LNG which, in turn, has an impact on the attractiveness of LNG sendouts to Europe, De Luca said.

Coal-to-gas fuel switching in the European power sector is to an extent determined by price levels in the EU ETS market, which are entering a fuel-switch range, he said, "but all other inputs come from the outside and the main factor is global commodity prices".

Changing generation stack

In many European power markets, the reserve margin of installed, controllable capacity in excess of peak demand is falling as thermal power plants are closing with few conventional units being built to replace them, Brokhof said. A tightening supply-demand balance in European power markets following years of overcapacity is contributing to a volatile power market environment, he said.

And measures such as the proposed phase-out of coal- and lignite-fired power generation in Germany might not lead to higher profit margins for generators in the form of rising clean dark and spark spreads, but they will increase price volatility in the power market, Krembel said.

Germany will complete its phase-out of nuclear generation by the end of 2022 and will take another 9.5GW of capacity off line from the end of this year. The proposed coal and lignite phase-out could result in the closure of 3 GW of lignite and 3-4 GW of coal-fired capacity beyond already announced and earmarked closures by the end of 2022.