Over the last three months, commodity prices have continued to fall strongly. In March 2016, Brent oil spot prices remained below 42 $/bbl, coal touched a low of 43 $/tonne and TTF gas fell to 11 €/MWh. Simultaneously, carbon prices fell by 40 percent.
This fall in commodity spot prices combined with temperatures above seasonal norms and high wind outputs in Western Europe led to very modest power spot prices during Winter 2015-16, as detailed in Genscape's latest Market Insight report.
The impact of these factors on German and Dutch forward power prices was surprisingly large. Prior to this quarter, power forward curves were only moderately impacted by the downward trend in coal, gas and oil prices. Indeed they appeared to have touched a floor, only moving by 2-3 €/MWh from quarter to another. Over the recent quarter however, we saw a shift of about 6 €/MWh.
This unexpected fall in power prices is partly the result of the latest evolution of the capacity mix, resulting in very little concern on the supply side in Western Europe. As detailed in Genscape’s latest EU Mid-Term Infrastructure report, the installed capacity in Germany and the Netherlands is expected to remain in an oversupply situation until at least the end of 2017. The commissioning of new large wind farms (+860 MW in the Netherlands and +2400 MW in Germany) is compensating planned plant closures. Simultaneously, there is a high confidence in the French adequacy of supply for the coming winters, with RTE approving the closure of the EDF-owned Cordemais and Porcheville. Although this will lead to a meaningful capacity reduction by 2017 (-3.7 GW), these oil-fired units were mostly used as back-up during cold snaps and have been rarely used over the last couple of years.
Using the EPSI Platform for fundamental power market analysis, Genscape has confirmed this combined effect of low commodity prices in an oversupply situation on future power prices. During the coming quarter, the German, Dutch and French markets are expected to converge at about 24.50 €/MWh, significantly below the levels seen one year ago. Summers 2017 and 2018 are expected to see prices hovering around 23-24 €/MWh. The high availability of supply in all the Western European markets will lead to prices converging to the marginal cost of the coal-fired units which will in addition benefit from very modest coal prices.
Great Britain is experiencing a different situation. The market is facing a significant capacity reduction and a shift in generation technology from coal to a mix of renewables, gas and nuclear. 2014 saw the closure of three out of four units at the Ferrybridge site (1470 MW) as well as the Ironbridge-1 plant (370 MW). The last unit of Ferrybridge (490 MW), two units of the Eggborough plant (980 MW) and the Longannet plant (2260 MW) are also stopping commercial operations. The last two units of the Eggborough plant (980 MW) are expected to be closed in March 2017. All of these are coal-fired units. This represents a significant decrease of 6.5 GW in the installed coal capacity. At the same time, by end 2018 only a very small amount of new capacity is expected to come online, mostly consisting of wind farms.
The impact of this capacity reduction is expected to be seen in Winter 2016-17. For this period, despite low gas and coal price forwards, power prices are expected to increase up to 39 £/MWh, about 4-5 £/MWh above the prices seen last winter. Winter 2017-18 is of particular interest as Great Britain's power market starts facing tight market conditions and in Genscape’s latest market report, expected monthly prices are largely above the forward prices and touch a high of 50 £/MWh.
The highlights presented in this blog post have been taken from the latest issue of Genscape's quarterly Market and Medium-Term infrastructure reports. Each quarter, Genscape leverages the knowledge of its team of field technicians who install and maintain monitoring equipment all around Europe and the EPSI power plant database to put in perspective recent changes (new announcements, monitored activity) for the main European markets. The impact of these changes and the latest market events are analyzed using the EPSI Platform to produce updated scenario results for Germany, France and the Netherlands, delivering valuable market insights. In addition, a special focus country is explored.
If you are interested in receiving Genscape's Quarterly Report bundle, please contact genscapesales@genscape.com.
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