Macquarie Sees German Power Rising 19% by 2016 on Carbon Gains

German year-ahead power prices may recover 19 percent by 2016 as higher carbon costs outweigh structural deficiencies in the country’s electricity market, according to Macquarie Group Ltd.

Australia’s largest investment bank is bullish on wholesale power, forecasting the year-ahead contract may climb to 50.40 euros ($67.04) a megawatt-hour by 2016, Robert Schramm-Fuchs, a London-based analyst at Macquarie, said in an e-mailed report. The 2014 contract, a benchmark in Europe, was at 42.25 euros at 11:49 a.m. in Berlin, according to broker data compiled by Bloomberg.

Electricity prices are tumbling to record lows as carbon permits, which fossil-fuel producers must buy to operate, are near their all-time low due to an oversupply that’s equivalent to about half of one year’s supply, according to Bloomberg New Energy Finance. A proposal by the European Commission, the EU’s regulatory arm, to delay the sale of some permits will succeed in cutting the glut, according to Macquarie.

“Our price forecast for German baseload assumes a slight recovery from current forward prices,” Schramm-Fuchs said. “We are more optimistic than the forward curve at this point.”

Macquarie estimates that European Union carbon permits will rise to 16.50 euros a metric ton in 2016 from 5.16 euros today.

“We are assuming a gradual recovery in the EU carbon price as we believe that political intervention will eventually tighten the market over the coming years,” Schramm-Fuchs said in the report.

Record Lows

Germany’s power market is “structurally broken” as retail power prices are increasing while wholesale prices have declined, and needs a radical overhaul, Schramm-Fuchs said. Germany will fail to transition to low-carbon power generation if cleaner natural gas is being priced out of the market while dirty lignite thrives, he said.

“Anomalies have formed in the German market that seem irreversible under the current market design,” he said.

Low electricity demand and priority access to the grid for solar and wind generators are pushing down wholesale power prices. At the same time the cost of building cables to carry renewable energy to where it is needed is pushing household bills higher, he said.

Shut Down

About 50 percent of hard coal and lignite plants in Germany are older than 30 years and near the end of their usable lives, according to Macquarie’s estimates. Some 10 gigawatts of capacity will be shut down in the next three years, the bank said.

Total German generation capacity was about 177 gigawatts at the end of 2012, up from about 166 gigawatts at the end of 2011. The increase is due to the addition of 7.6 gigawatts of solar, 1.7 gigawatts of wind and 1.4 gigawatts of thermal capacity.

German clean-dark spreads for 2014, a measure of coal plant profitability, will rise to 11 euros a megawatt-hour in 2013, Macquarie said. That’s compared with 7.53 euros today, data compiled by Bloomberg show. The clean-spark spread, a measure of profits from burning natural gas, stood at minus 14.86 euros a megawatt-hour as of 1:19 p.m. Berlin time.

“Clean-spark spreads are unlikely to recover, and in fact we assume a further compression of peak spark spreads,” Schramm-Fuchs said.

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