German Power’s Rebound Seen Ending on Coal SlideRachel Morison
The gains that drove German power prices to their first quarterly advance in more than two years are poised to peter out after a rally in coal ended.
Power for 2014 delivery in Europe’s biggest economy rose 1.8 percent in the three months through September, ending an unprecedented streak of nine quarterly losses, according to broker data compiled by Bloomberg. Twelve out of 17 traders and analysts surveyed by Bloomberg since Sept. 19 predict the benchmark contract will drop or remain unchanged by December, with UBS AG forecasting a slide of as much as 14 percent.
The record sequence of declines through June has prompted utilities from EON SE to RWE AG to run plants at a loss amid the biggest ever program of closures, taking units with the capacity to supply 32 million European households offline, according to data compiled by Bloomberg. Prices for hard coal, the fuel used to generate about 19 percent of Germany’s power, have declined after jumping the most in five months in the two weeks through Sept. 13, giving electricity buyers more sway.
“The outlook for central-west European generation is deteriorating despite announced capacity closures,” Patrick Hummel, an analyst at UBS in Zurich, said yesterday in a report. “Prices will remain muted for the foreseeable future.”
German 2014 power closed at 38.20 euros a megawatt-hour ($51.65) on Sept. 30 after rising to a five-month high of 39.85 euros on Sept. 13, broker data show. It closed at 38.21 euros today.
Five respondents in the Bloomberg survey said the next-year contract may rise, remaining below 40 euros. Hummel at UBS said prices may fall to as low as 33 euros.
Wholesale costs have declined almost 60 percent after peaking in 2008 above 90 euros as a boom in renewable energy in Germany boosted supplies at the same time as the financial crisis last year cut demand to its lowest level since 2009, according to AG Energiebilanzen e.V., an association of energy lobbies and research institutes.
European next-year coal surged to a seven-week high of $86.35 on Sept. 18, broker data show. It has declined 4.4 percent since then because of expectations that supply will increase after miners at Drummond Co.’s Colombia operations returned to work on Sept. 14, Melinda Moore, an analyst at Standard Bank Plc in London, said yesterday by e-mail.
Coal is more profitable to burn than natural gas at power stations, according to Bloomberg data. The fuel will be used first by grid operators to meet demand, which gives it an influence in setting the price of electricity. Generators can earn 14.08 euros a megawatt-hour from burning coal next month compared with a 14.67 euro loss by using gas, according to data compiled by Bloomberg.
“The rise and fall of power was linked to the coal and emissions markets,” Ricardo Klimaschka, a power trader at Energieunion GmbH in Schwerin, Germany said yesterday by phone. Some traders are operating in all three markets and typically buy and sell power, coal and carbon at the same time, he said.
Dusseldorf-based EON, RWE in Essen and Stockholm-based Vattenfall AB, the three biggest utilities operating in Germany, will close more than 16,000 megawatts of generating capacity in central-west Europe by 2015, company filings show. A supply of 1,000 megawatts is enough to power about 2 million European homes.
The German next-year clean-spark spread, a measure of the profitability at plants burning natural gas, has been negative since January last year and will stay below zero until 2016, according to forward prices and fair-value calculations on Bloomberg. It closed at minus 17.44 euros a megawatt-hour today after sliding to as low as minus 19.37 euros on Aug. 7.
“Expectations of how much the market is oversupplied have decreased due to talk about capacity closures,” Roland Vetter, head of research at CF Partners U.K. LLP, said Sept. 18 by phone from London. “I expect some sidewards movement in the year-ahead power price around 38 to 40 euros with some volatility.”
Utilities from EnBW Energie Baden-Wuerttemberg AG in Karlsruhe, Germany, to Courbevoie, France-based GDF Suez SA plan to start 13 new power plants, equivalent to 9,500 megawatts in Germany by 2016, according to data compiled by Bloomberg.
“The German power system will be more than adequately supplied, thanks to existing and planned new generation, moderate retirements and chronically muted demand,” said Paolo Coghe, an analyst covering European power, coal and carbon Societe Generale SA in Paris. The next-year contract may trade at 39 euros by the end of December, he said on Sept. 16.
October, the start of the six-month winter heating season, is set to be warmer than usual in Europe, according to four out of five forecasters surveyed by Bloomberg on Sept. 27. This may reduce power and natural gas demand as fewer people switch on heating equipment to keep warm.
“As winter begins and solar power drops away, the price direction will depend a lot on the weather,” Gary Hornby, an energy-markets analyst at Inenco Group Ltd. in Lytham, St. Annes, England, said by e-mail.