Record Low Power Prices Stung by Plunging Use in EuropeRachel Morison and Marek Strzelecki
The slump in European power that has driven prices to record lows is showing no sign of ending as the region’s second recession in four years curbs energy use.
Electricity for the next year in Germany, Europe’s biggest economy, will probably fall 9.2 percent in 2013, extending its 17 percent decline last year, according to Credit Suisse Group AG. Power demand in Germany will drop 2 percent this year, the same amount as in 2012, Bank of America Corp. said.
Europe’s electricity use has struggled to recover since 2009, when the region was hit by its worst recession since World War II. Demand is poised to shrink 1 percent annually in the seven years through 2020, Credit Suisse said. That’s being compounded by German Chancellor Angela Merkel’s backing for renewable energy, which is causing gas-fired plants including those owned by EON SE to lose money.
“German power prices are more and more influenced by the addition of renewable power generation as well as the economy,” Dirk Seidel, a trader at Dong Energy Markets GmbH in Leipzig, Germany, who has bought and sold power for six years, said in a Dec. 28 phone interview. “And I don’t see any reason why the market should reverse its trend based on either of the two.”
Electricity for 2013 fell to a record 44 euros ($58) a megawatt-hour on Dec. 27, the lowest for a year-ahead contract since 2009, and last traded at 44.05 euros Dec. 28, according to broker data compiled by Bloomberg. The French next-year contract dropped to 46.55 euros on Dec. 27, its lowest since December 2009. The two countries are the region’s biggest users.
European Union carbon allowances slid 12 percent last year as the bloc’s regulator hesitated over plans to curb supplies of permits. That made it cheaper for utilities to burn more-polluting coal instead of gas. The share of renewable capacity in German electricity generation has almost doubled since 2006, creating more supply than needed to meet demand, Bank of America said in a November report.
The European Commission has proposed a delay in the sale of permits to emit 900 million metric tons of carbon dioxide in the next three years, a measure known as backloading that is expected to boost 2013 carbon prices, which fell to a record 5.93 euros on London’s ICE Futures Europe exchange on Dec. 5.
“The only support for power prices would be a higher carbon price, which requires a successful backloading policy from the European Commission,” Mark Owen-Lloyd, co-founder of Leap Trading Ltd. and an energy trader for seven years, said by e-mail from London on Dec. 27.
German year-ahead power, a European benchmark contract, may slide 4.7 percent this year to as low as 42 euros a megawatt-hour, according to UBS AG.
“This is driven by our expectation of a further drop in the carbon price as well as worsening oversupply,” Patrick Hummel, an analyst for UBS in Zurich, said by e-mail.
Prices may fall below 40 euros a megawatt-hour from 2014 if overcapacity isn’t cut and demand keeps shrinking, Vincent Gilles, a London-based analyst at Credit Suisse, said in a Dec. 12 report. Power for 2014 dropped 0.6 percent to a record 45.15 euros today, broker data show.
Expected capacity additions of 10.5 gigawatts of coal- and gas-fed plants and growing output from renewable sources may delay the recovery of margins, Petr Bartek, an analyst at Erste Group Bank AG in Prague, said in a November report. A nuclear reactor typically generates about 1 gigawatt, enough to supply 2 million European homes.
Societe Generale SA on Nov. 20 revised its forecast for year-ahead German electricity in the first three months of 2013 to 50.40 euros a megawatt-hour. The bank, France’s second-biggest lender by market value, previously predicted a price of 52 euros.
“Power prices are not that low compared to the average quarterly prices since 2009,” Paolo Coghe, a Paris-based analyst at the bank, said in an interview on Dec. 12.
Profits at gas-fed power plants in Germany and France have been negative over the past year, hurting profits at EON and GDF Suez SA. The German 2013 clean-spark spread, a measure of returns from using gas to generate energy, fell 6 percent to a record minus 13.94 euros a megawatt-hour on Dec. 27, broker data show.
Shares of EON plunged the most in 20 years in November after the company scrapped profit forecasts and said it may have to close units as falling electricity prices made it difficult for gas-fired plants to make money. Germany’s largest utility was the worst performer on the country’s DAX stock index last year.
Shareholders asked EON in December to shut the Irsching-5 gas-fired plant temporarily because it’s unprofitable. The two-year-old, 860-megawatt facility in Bavaria operated for less than 1,600 hours in 2012, compared with 4,000 hours the previous year, EON Chief Executive Officer Johannes Teyssen said on a Nov. 13 conference call.
The German 2014 clean-dark spread fell as much as 5.8 percent to 7.67 euros a megawatt-hour today, the lowest since June 2011, according to data compiled by Bloomberg.
Germany’s gross domestic product is forecast to have grown by 0.9 percent in 2012, compared with a 0.4 percent decline in the euro area, according to the median of 41 analyst estimates compiled by Bloomberg. The economy may expand by 0.8 percent in 2013, compared with a 0.1 percent drop in the 17-member currency region, the data show.
“Even if the German economy continues to grow in 2013, and the euro zone exits recession, the supply story will remain the same with a low carbon price, low coal prices, good coal profitability,” Owen-Lloyd said.
GDP in the euro area will contract 0.6 percent in the first three months of this year, according to the median of 25 analyst estimates compiled by Bloomberg.
“Without positive economic data we will not see demand recover,” Konstantin Lenz, managing director at Lenz Energy in Berlin and a power market analyst for 10 years, said by e-mail on Dec. 27.