German Power-Price Swings Threaten Growth Engine: Energy Markets

The lack of clarity on Germany’s energy policy is creating the most volatile power prices in seven months, boosting costs for industry in Europe’s largest economy.

The 30-day historical volatility in the price of power for 2014 more than doubled in the past six weeks to the highest since March 4, data compiled by Bloomberg show. Prices are being whipsawed because Chancellor Angela Merkel, re-elected almost a month ago, has yet to give details on her pledge to amend the nation’s $750 billion solar and wind power program, according to CF Partners U.K. LLP, a London-based adviser and trading company focused on renewable energy and commodities.

Price swings in Europe’s biggest power market, exacerbated by plunging fuel and carbon costs, are making it harder for industrial users to plan purchases. The volatility is boosting total costs and hindering investment in the $3.4 trillion economy, according to Maik Neubauer, a management consultant specializing in utilities and commodity markets and the former chief operating officer of the European Energy Exchange AG.

“Our problem right now is that we would like to buy our power mid-term, so for the next four to six quarters, but we prefer not to right now because of the high volatility in the market,” said Munich-based Christian Essers, the director of energy procurement at Wacker Chemie AG, Europe’s largest maker of polysilicon used in solar panels. “If volatility is higher for longer-term products, then we usually pay more for securing future costs.”

Coal Costs

The 2014 contract dropped 0.1 percent this month after posting its first quarterly gain for 2 1/2 years in the three months through September, broker data compiled by Bloomberg show. It closed at 38.25 euros ($51.60) a megawatt-hour today. Its 30-day volatility rose as high as 16 percent on Oct. 10, from less than 7 percent at the end of August. The contract, a European benchmark, has lost 15 percent this year.

German wholesale electricity prices retreated as the cost of hard coal, used to generate 19 percent of the nation’s power, dropped 12 percent in the past six months to the lowest level since 2009, broker data show. The cost of carbon permits to emit a ton of greenhouse gases fell 2.8 percent since Merkel’s victory Sept. 22, to a five-week low of 4.51 euros on ICE Futures Europe on Oct. 14. The contract settled at 5.34 euros today.

“For a long time power has been a one-way trade with people expecting it to decrease gradually,” said Roland Vetter, the head of research at CF Partners. “The bet has become less clear with more talk about capacity closures, uncertainty about Merkel’s energy policy and slumping fuel costs making prices more volatile.”

Renewable Energy

Merkel has said changing the renewable-energy law will be her first priority after securing a third term. Her plan to source at least 35 percent of the nation’s power from mainly solar and wind by 2020, compared with 23 percent now, has pushed residential bills to more than twice the amount that utilities pay to deliver the electricity, as taxes and charges that subsidize the plan inflate prices, according to BDEW, a Berlin-based lobby group.

The chancellor was left with the Social Democrats as her sole potential governing parter after the Greens dropped out of coalition talks citing irreconcilable differences over tax policy.

Talks Ending

Talks between Merkel’s bloc and the Green party broke down last night amid differences over energy and tax policies, Claudia Roth, the Greens co-leader, said on Germany’s ZDF state television.

“On the specifics of energy, the minimum wage and a citizen’s insurance, there was no movement and that’s why we said it’s no basis for us” to continue talks to form a government, she said.

The Social Democrats want to streamline efforts to reform the energy law, make the switch to renewables more cost-efficient and improve the EU emissions trading system, its election manifesto said.

“A coalition between CDU/CSU and SPD has already been the most likely option, and now it seems inevitable,” Patrick Hummel, Zurich-based analyst at UBS AG, said today in an e-mailed note. “We think this is the less bad scenario for utilities, even though there is nothing to get excited about.”

The current government is split on a decision to delay the sale of some EU carbon permits, known as backloading. CDU’s Environment Minister Peter Altmaier supports the plan. Economy Minister Philipp Roesler from the FDP, which will drop out of parliament after winning less than five percent of the votes in the election, opposes the measure.

Merkel Support

“We need a certain degree of backloading of CO2 emissions so certificate prices return to a sensible level,” Merkel said in a speech today to a labor group in Hanover. “That’s OK, because the economic growth rates on which the pool of CO2 certificates is based haven’t happened in the last few years.”

Daily swings in the 2014 power contract averaged 1 percent this month, according to data compiled by Bloomberg. That’s the highest for the period since 2008, when the benchmark price rose or fell an average of 2 percent a day as the bankruptcy of Lehman Brothers Holdings Inc. roiled markets.

German power’s 30-day volatility measure is the second-highest in Europe’s three biggest electricity markets. Price swings in the Nordic region peaked at 17 percent on Oct. 10, while they rose to 12 percent in France on the same day, according to broker data compiled by Bloomberg.

Longest Recession

“Large companies have to deal with larger capital and margin requirements in their risk management if volatility increases,” said Neubauer, who is based in Hamburg. “This means fewer investments in other areas which will have a direct impact on demand for goods and services in other industries,” he said.

Germany’s economy expanded 0.7 percent in second quarter, after stagnating in the first three months of the year, as the 17-nation euro area emerged from its longest-ever recession. The nation will expand 1.8 percent next year, from 0.5 percent in 2013, according to the mean of 57 economist estimates compiled by Bloomberg.

Trading on EEX reached a record last month, with traders buying and selling futures representing 178 terawatt-hours of power, the Leipzig, Germany-based exchange said Oct 7. Germany consumed 606 terawatt-hours of power in 2012. Trading beat the previous record set in March 2011, when prices surged on Merkel’s decision to shutter reactors following Japan’s Fukushima nuclear disaster.

“High volatility is good for us traders, because it means you can make more money,” said Min-Soo Park, an electricity trader at MVV Trading GmbH in Mannheim, Germany. “If you want to generate 10 or 15 euro cents on a contract that moves only 20 cents, then that can be difficult. But with a bigger price move, it’s easier to earn money on the market.”

Before it's here, it's on the Bloomberg Terminal.