Merkel’s deal set to spark volatility in power market
February 09 2018 08:53 PM


After wild swings roiled stock markets from Hong Kong to New York this week, Germany’s power traders are about to get their own taste of volatility.
They might be in for a rocky ride as details may soon start to emerge on how the new government coalition will phase out coal-fired generation in Europe’s biggest economy. Traders from Vattenfall AB to Axpo Holding AG agree that the amount of capacity that will be retired and exactly how quickly will be the biggest driver for wholesale power prices for years to come.
Traders are looking forward to some clarity, and some say news dripping out of Berlin could set the market alight again. Price swings for power traded two years ahead, when plants could start to shut, are near their lowest level since 2015.
Companies may hold back from taking on big positions until more details are known, says Stephan Riezler, head of trading at Steag GmbH, whose plants supply 4% of Germany’s electricity.
As Merkel was holed up for days with the Social Democrats to hammer out a deal to run the country for the next four years, the future of the world’s dirtiest power fuel was one of the talking points. Over at the giant E-world fair in the western city of Essen, the crunch talks in Berlin were among the most talked-about topics.
Chancellor Angela Merkel’s coalition agreed that a commission will look into how much coal and lignite generation needs to shut to meet 2030 climate goals. The group will publish its recommendations next year. While Germany will still need some steady plants to support intermittent renewables, a gap in supply may also emerge after the last nuclear plant shuts in 2022.
Dubbed the “Coal Commission” when formed last year, its focus will initially be on lignite closures and how to compensate regions where mining and power generation takes place. Its remit will potentially broaden to discuss possible hard coal closures when it reconvenes in spring. The Economy and Energy Ministry was Friday unable to name a date for the next meeting.
Coal is being squeezed out by Germany’s unprecedented shift toward a greener and more decentralised energy system. At the same time, the government is phasing out nuclear power stations, which it intends to have closed entirely by 2022. Estimates for how much capacity will actually shut range from RBC Europe Ltd’s prediction of 25 gigawatts to Vattenfall’s mere 5 gigawatts.
If the outcome is closer to RBC Europe’s forecast, jumps in prices “could be explosive,” says Domenico de Luca, head of trading at Swiss utility Axpo Trading AG. As coal and lignite capacity exits the market and renewables contribute more to baseload generation then “there will be more price spikes.”
Here’s what some of the biggest traders and generators say:
Vattenfall: “The political side has a big impact. The market is now pricing in approximately 5 gigawatts of closures,” says Frank Van Doorn, acting head of trading. “Political intervention is necessary” since the current carbon price is too low to permanently close inefficient plants, says Niek Den Hollander, senior vice president for markets at the Swedish utility.
Steag: “Now the market is pricing in no closures. There will be volatility as discussions emerge and the outcome will be the most important driver for long-term prices,’’ says Riezler. What happens “will have an impact on Steag and every other generator in this country. It’s difficult to evaluate the impact until we know how they will do it.”
Axpo: “It will be a big consequence for the market if the decision is to remove lignite,” says de Luca. “Germany will need more gas but how quickly depends on the political decision on the phaseout and the carbon price. Coal retirements would have an impact on carbon prices as there will be less demand.”
Danske Commodities: The coal phase-out will also be a decider for gas prices. “The next big thing in gas markets and where gas is headed depends on what happens in Germany. It is an exciting time for Germany what the government decides, it’s a big theme to watch,” says Jesper Tronborg, head of gas and power trading.

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