Power Diverging Most Since 2010 Shows EU Split: Energy Markets
Power prices in France and Germany are diverging more than at any time since they were linked three years ago as conflicting national energy policies undermine the European Union’s plan for a single market in 2014.
Next-day prices in the region’s two biggest consumers were the same on 42 percent of the trading days in the first six months of this year, compared with 60 percent in the same period last year and 68 percent in 2011, according to data from the Epex Spot SE exchange in Paris. French electricity for delivery next year traded last month at its highest premium to the equivalent German contract since 2009, broker data compiled by Bloomberg show.
German Chancellor Angela Merkel’s ambition to replace nuclear power with renewable energy within a decade underscores how national energy policies, from subsidizing solar and wind to setting a minimum price for emissions, is overriding coordinated strategies for a common market. France’s Prime Minister Jean-Marc Ayrault plans a national market for peak electricity that obliges generators to guarantee supplies, reducing the nation’s dependence on neighbors at times when demand is at its greatest.
“There is a conflict between the EU goal of an internal market and national decisions on energy mix, renewables-support schemes and a carbon price floor,” Peter Reitz, chief executive officer of the European Energy Exchange AG, said in a Sept. 5 interview in London. “Better coordination will lead to more price convergence.”
French power for delivery tomorrow settled at 36.08 euros ($47.91) a megawatt-hour in an auction today on Epex Spot, 65 euro cents higher than the equivalent German contract. German next-year electricity, a regional benchmark, was as much as 5.55 euros a megawatt-hour cheaper than for France on Aug. 7, the most since November 2009, according to broker data compiled by Bloomberg. The differential was 4.10 euros today.
The link between Germany and France was established through so-called market coupling in November 2010. The process is part of the EU’s third package of legislation to reduce national barriers in power and natural gas to cut consumer prices, which gained 23 percent in the five years through 2012, according to Eurostat data compiled by Bloomberg Industries.
The European Union plans to link day-ahead markets in 28 countries by the end of 2014 to allow power to flow freely across nations to the markets with the highest prices.
“With market coupling, power is always moving to where prices are highest but as interconnection is limited you are left with different prices,” Stephen Woodhouse, a director at Poeyry Management Consulting, said Sept. 6 by phone from London. “If prices are the same in two zones all the time, then it would show a surplus of interconnection that isn’t being used.”
Integrated electricity markets may save consumers and producers as much as 40 billion euros a year, while the equivalent saving in the gas industry is as much as 30 billion euros a year, according to the EU.
Day-ahead coupling of 18 northwest and southwest European countries is scheduled to start in November, Nord Pool Spot, the Oslo-based exchange involved in the project, said on May 7.
“The ultimate goal is complete price convergence across Europe, and market coupling can go some way to achieve this,” said Jean-Francois Conil Lacoste, Epex’s chief executive officer, who led the coupling of France, the Netherlands and Belgium in 2006. “Even if prices diverge, the spread between markets narrows through market coupling,” he said Sept. 10 by e-mail from Paris.
Germany, Europe’s biggest producer of electricity from wind and the sun, plans to boost its share of renewable energy to 35 percent in 2020, up from 22 percent last year. The U.K. is encouraging renewable energy through a minimum price for carbon emissions, increasing operating costs for power stations burning coal. France plans to introduce so-called capacity certificates in 2016 to ensure availability of power plants at times of peak demand, according to CRE, the energy regulator based in Paris.
“European power prices are converging less than when market coupling started as individual countries seek separate solutions for their power markets,” Oliver Koch, deputy head of the internal markets unit at the commission’s Directorate-General for Energy, said at a conference in Cologne, Germany on Sept. 3. “There needs to be coordination on a European level.”
Utilities and grid companies need to invest about 210 billion euros to upgrade and expand Europe’s electricity and gas infrastructure by 2020, according to the commission.
“The links are actually still so bad, you can’t take one business plan and apply it to all central European markets,” said Simon Gadd, a senior energy adviser on European power, gas, emissions and coal at LEAP Energy Ltd. in London, who traded energy for 13 years.
Germany’s renewables boom means prices in Europe’s biggest economy have become less linked to wholesale costs in the neighboring French market, Gadd said July 31 by e-mail.
French power for next-year delivery traded at an average premium to Germany of 3.37 euros in the 12 months through yesterday after becoming more expensive than its northern neighbor on March 2, 2012, broker data show.
Vattenfall AB, the Nordic region’s biggest utility, will on Jan. 1 split the company into one unit for Scandinavia and another for continental Europe and the U.K. to mitigate “gloomy market prospects” and increasingly national policy agendas, the Stockholm-based company said July 23.
“Each country decides more and more on their specific energy markets themselves,” Oeystein Loeseth, the company’s chief executive officer, said on a call with analysts. “This makes it a bit difficult to predict what is going to happen in each specific market.”
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