German Power Set for Record Slide Without Carbon Fix

German Power Needs Carbon Fix to End Record Drop
Electricity for 2013 delivery in Germany, a European benchmark, slid to a record of 48.45 euros a megawatt-hour today, according to broker prices compiled by Bloomberg. Photographer: Michele Tantussi/Bloomberg

The European Union’s failure to decide whether to curb supplies of emission permits is sending prices for electricity in Germany, Europe’s largest market, toward their biggest losing streak since at least 2006.

Power for 2013 delivery has fallen as much as 8.8 percent this year to a record low today, according to broker data compiled by Bloomberg. It may decline a further 7.1 percent by November, according to UBS AG. Adapto Advisors AB, a hedge-fund manager, forecasts an additional 5 percent slide this year.

Electricity prices are tumbling as coal trades near its weakest level in 19 months and carbon permits, which fossil-fuel producers must buy to operate, stay near all-time lows. While that’s benefiting consumers such as Bayerische Motoren Werke AG and steelmaker ThyssenKrupp AG, it’s hurting utilities including EON AG and RWE AG, stoking calls for the EU to ease the surplus of permits caused by the economic slowdown.

“German power will most likely fall further without intervention by the EU,” Fredrik Adolfson, a fund manager at Adapto in Stockholm and an energy trader for 13 years, said in a May 18 telephone interview. “Coal prices have been depressed and we don’t see this changing in the short term, adding to the downward pressure on power,” said Adolfson, whose fund gained 4 percent from January through April.

Record-Low Price

Electricity for 2013 delivery in Germany, a European benchmark, rose 0.2 percent to close at 48.70 euros ($61.20) a megawatt-hour, after sliding to a record of 48.40 euros earlier today, according to broker prices compiled by Bloomberg.

Prices may drop as low as 45 euros by November, Patrick Hummel, an analyst at UBS in Zurich, said May 10 by e-mail. That would amount to a 15 percent decline in the first 10 months of the year, the most since Bloomberg began tracking prices in 2005.

EU carbon permits for December have lost 60 percent of their value in the past 12 months amid the glut. The surplus grew to 946 million metric tons in 2011, a 67 percent increase on the previous year, according to Bloomberg New Energy Finance. The permits closed at 6.90 euros a metric ton, up 10 cents, on the ICE Futures Europe exchange in London.

“Fundamentally, there’s a surplus of permits,” Pawel Smolen, the Berlin-based head of power-production asset management at Sweden’s Vattenfall AB, said by e-mail. “The price is above 6 euros only thanks to uncertainty over the future and bets on a possibility of using permits after 2012.”

Smolen, who has held executive positions in the company for more than 10 years, is in charge of 30 gigawatts of power capacity in Germany, Sweden, Netherlands and Denmark.

Market Tightening

The supply of permits has increased as Europe’s economy sputtered amid concern that countries such as Greece will struggle to pay their debt, forcing them to abandon the euro. Gross domestic product in the 17-nation currency region may shrink 0.3 percent this year, according to the median of 41 analyst forecasts compiled by Bloomberg, compared with 1.5 percent growth in 2011.

Efforts by the EU to permanently remove some of the permits from the market after 2013 have run into opposition from Poland, which relies on coal for about 90 percent of its power generation needs. The EU commission, the bloc’s executive arm, is now examining an option to delay some supply until closer to 2020. The measures may still not “do the whole trick,” the region’s Climate Commissioner Connie Hedegaard said in Brussels on May 15.

“It is very likely that some form of market tightening will occur,” Konrad Hanschmidt, a Bloomberg New Energy Finance analyst in London, said by e-mail. “The question is more about when and how EU policy makers could curb allowance supply.”

Bearish Second Half

As many as 700 million tons of allowances may be delayed, a decision that would push prices up by a “couple of euros,” according to Trevor Sikorski, an analyst for Barclays Plc.

“The second half of this year could be very bearish for emissions prices,” he said in an interview in London on May 22. “2013 will be slightly better. The uncertainty is around political intervention.”

European coal fell as low as $98.25 a ton yesterday, its lowest level since September 2010, and closed at $100 today. A surplus of the fuel will keep prices from rising in coming months, Henrich Quick, a principal analyst at Poyry Oyj, said by phone from Dusseldorf.

Positive for Consumers

Sliding power prices have been “positive” for industrial consumers, Roland Schmied, a spokesman for Verband der Industriellen Energie und Kraftwirtschaft, or VIK, said by phone from Essen, Germany, on May 21. VIK represents energy users including Volkswagen AG, Europe’s biggest carmaker, and ThyssenKrupp, the nation’s biggest steelmaker.

While coal-fired power stations benefit from the decline in prices, those that use gas are suffering. EON, Germany’s biggest utility, is studying the profitability of its gas plants on a case-by-case basis and hasn’t ruled out permanent closures or mothballing, Chief Financial Officer Marcus Schenck said on a May 9 conference call.

Gas-fired plants in Germany are losing about 10 euros a megawatt-hour by producing electricity, according to a calculation known as the clean spark spread, which is based on gas, power and emissions prices for next month. The measure has been negative since Feb. 8, according to data compiled by Bloomberg.

Waiting Game

While low prices make forward power contracts attractive for industrial consumers, it may be more beneficial to wait for further declines as the summer brings “very low” prices given Germany’s expansion of solar power, according to John Brottemsmo, senior market analyst at Bergen Energi AS, which advises companies in managing energy costs.

“We’re looking at attractive levels but perhaps waiting a bit more is reasonable,” Bergen, Norway-based Brottemsmo said in a May 23 telephone interview.

Electricity production from solar photovoltaic panels in Germany jumped 62 percent to 19 terawatt-hours last year, according to data from Bundesverband Solarwirtshaft, a Berlin-based lobby group. New solar power capacity amounted to 7,500 megawatts in 2011, more than double the 3,000 megawatts the government forecast. A megawatt is sufficient to supply about 2,000 European homes.

“We are yet to see what the additional solar in Germany will do to power prices if we have a sunny summer,” said Adolfson at Adapto, who declined to comment on assets under management for his company’s energy fund. “We could see even more depressed spot prices which filter in to the forward contracts.”

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