Volatility, risk, and risk-premium in German and Continental power markets Stefan Judisch Supply & Trading GmbH RWE Supply & Trading PAGE 0
Agenda 1. What are the market fundamentals telling us? 2. What can we observe in the traded market? 3. How will future developments impact merit order economics? 4. Summary and conclusions RWE Supply & Trading PAGE 1
Various fundamental factors influence power prices on the long-term forward market A Fuel forward curves CO 2 prices Gas prices Crude prices Coal prices Reservoir Reservoir Marginal costs of hydro plants level thermal plants Power plant Supply new build Renewable Wind capacity Thermal power Available power growth generation capacity Subsidies & generation Power plant technical C closures progress PV capacity growth Power Cross-border exchange balance price B Seasonal Air conditioning / Residential Comfort of temperature Electric heating demand living forecast Energy Demand Industrial demand efficiency Weather impacts Macro cycle D RWE Supply & Trading PAGE 2
A B C D With the exception of coal, energy prices moved mostly sideways over the last two years As of March 2014 CO 2 2014 (EUR/EUA) Coal Cal2014 (USD/t) 2012 2013 2012 2013 TTF Sum2014 (EUR/MWh) German Power Cal2014 (EUR/MWh) (coal at the margin) 2012 2013 2012 2013 RWE Supply & Trading PAGE 3
A B C D Recent energy price developments continue to move sideways As of August 2014 CO 2 2014 (EUR/EUA) Coal Cal2014 (USD/t) 2012 2013 2014 2012 2013 2014 TTF Sum2014 (EUR/MWh) German Power Cal2014 (EUR/MWh) (coal at the margin) 2012 2013 2014 2012 2013 2014 RWE Supply & Trading PAGE 4
A B C D German power supply – renewable capacities continue to grow German photovoltaic and wind installations account for 46% of installed capacity and 19% of generated power in 2013 Total capacity installed (GW) Expected capacity growth (GW) Solar Max Solar Min Wind Offshore Wind Onshore RWE Supply & Trading PAGE 5
A B C D For a number of thermal plants the energy only market is no longer viable Closure announcements are cause for concern > Based on current Plant additions and closures in Germany (MW) 1 announcements Germany will loose more than 4 GW of ‘dependable’ generation between now an 2018 > From 2015 onwards announced plant closures will tighten the capacity outlook 1 According to BNetzA (July 2014) RWE Supply & Trading PAGE 6
A B C D While there is sufficient capacity right now, additional plant closure announcements will eventually tilt the system 2013 Until 2018 2023 > The BNetzA’s view on security of supply has been assessed starting from 2013 figures and adding known capacity changes Mothballed (net capacity development is negative to plants 2018) Decommissioning > To ensure security of supply TSO’s will according to BNetzA require 5 GW capacity margin above expected load for every hour MW Nuclear capacity to > In this assessment mothballed capacity is be decommissioned assumed to contribute to security of supply until 2023 as it can be reactivated when necessary > Without any additional decommissioning, Remaining security of supply will not be seen as IED-related capacity incl. decommissioning 1 endangered (much) before 2018 capacity from abroad (AT, LU) > Assuming that the regulator wants to maintain 5 GW capacity margin to cover forecast errors additional 3-5 GW plant decommissioning would intensify the 1 IED - Industrial Emissions Directive discussion on security of supply 1 Source: BNetzA (July 2014) without newly announced RWE closures RWE Supply & Trading PAGE 7
A B C D E.ON announced early nuclear shutdown RWE Supply & Trading PAGE 8
A B C D German power demand – power consumption remains weak Energy-intensive industries are cutting production and consumers produce their own energy Average change of weekday load compared to previous year Low load in May (-12%) not representative due to higher number of bank holidays Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Source: Entso-E Power Consumption (preliminary hourly data) RWE Supply & Trading PAGE 9
Agenda 1. What are the market fundamentals telling us? 2. What can we observe in the traded market? 3. How will future developments impact merit order economics? 4. Summary and conclusions RWE Supply & Trading PAGE 10
The power price development over the last twelve years in Germany show… Forward versus spot prices (EUR/MWh) Cal 02 Cal 07 Cal 12 Cal 03 Cal 08 Cal 13 Cal 04 Cal 09 Cal 14 Cal 05 Cal 10 Spot 1 Cal 06 Cal 11 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1 365d spot moving average RWE Supply & Trading PAGE 11
…that the risk premium has been mainly in forward parts of the price curve (spike risk) Spread between forward and spot prices (EUR/MWh) Cal 02 Cal 07 Cal 12 Cal 03 Cal 08 Cal 13 Cal 04 Cal 09 Cal 14 Cal 05 Cal 10 Spot 1 Cal 06 Cal 11 Risk premium (right scale) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1 365d spot moving average RWE Supply & Trading PAGE 12
With plenty of generation capacity available, the market does no longer price in a risk premium Contango has been reinstated in the front of the curve Spread between implied versus front year (EUR/MWh) 1 Implied Year (FY0) 2 Front Year (FY1) Second Year (FY2) Risk premium (right scale) 2012 2013 1 German power baseload 2 Implied Cal as weighted average of spot settlements and balance-of-year forwards RWE Supply & Trading PAGE 13
The market expects that renewable generation is growing faster than utilities will close their plants Spread between year 3 versus year 1 (EUR/MWh) Year 1 Year 2 Year 3 Risk premium (right scale) 2012 2013 RWE Supply & Trading PAGE 14
The market expects also that German dark spreads will follow the decline of spark spreads Average clean dark and spark spreads (EUR/MWh) 1 Expectations for dark spreads (EUR/MWh) 2013 forward 2014 forward 2015 forward 16 Year 1 12 Year 2 8 Year 3 4 0 -4 -8 -12 -16 Trading year 2012 Trading year 2013 Trading year 2014 CDS Cal 2013 – 15 Base load (€/MWh) (assumed thermal efficiency: 36%) 2009 2010 2011 2012 2013 Average CDS Cal 2013 – 15 CSS Cal 2013 – 15 Peak load (€/MWh) (assumed thermal efficiency: 49%) Something has got to give! Average CSS Cal 2013 – 15 1 RWE Supply & Trading, prices until 25 February 2014 RWE Supply & Trading PAGE 15
Germany’s oversupply is dragging adjacent markets lower as long as there is sufficient border capacity European power prices (EUR/MWh) > European power price convergence until 2012 90 Capacity > Since then prices diverged constraint 80 > In the Netherlands and UK Capacity 70 constraint gas-fired power plants mostly set prices; whereas in 60 Germany, France and Poland cheaper coal-fired plants are 50 price setting 40 > Renewable additions exceed 30 the extension of cross-border Germany capacities Netherlands 20 UK > Germany is increasingly no 10 Poland longer able to export its France surplus renewable power 0 2009 2010 2011 2012 2013 production RWE Supply & Trading PAGE 16
The volatility in the German power market is shifting to the front of the curve… Annualised volatility compared to 2001: Forward versus spot Forward 1 Spot 2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 Front year baseload 2 Day-ahead baseload RWE Supply & Trading PAGE 17
…and intraday market becomes more relevant to trade around actual solar and wind production Trading volumes on EPEX compared to 2010: Day-ahead versus intraday Day-ahead Intraday Market participants in 2010 Market participants in 2013 Day-ahead trading: 94 Day-ahead trading: 208 Intraday trading: 89 Intraday trading: 198 2010 2011 2012 2013 RWE Supply & Trading PAGE 18
A first blip of light at the end of the tunnel Intraday vs Day-ahead: This year’s calendar week 28 (EUR/MWh) Intraday high / low Day-ahead Intraday 07 July 08 July 09 July 10 July 11 July 12 July 13 July RWE Supply & Trading PAGE 19
Agenda 1. What are the market fundamentals telling us? 2. What can we observe in the traded market? 3. How will future developments impact merit order economics? 4. Summary and conclusions RWE Supply & Trading PAGE 20
German merit order in 2013: prices and volatilities for different hours of the year Capacity (GW) System services Renewables Announced for closure Marginal cost (EUR/MWh) Nuclear 1 or closure candidates Lignite A cold winter hour with low intraday volatility Coal Gas A winter hour with high intraday volatility Oil A average hour Others with low intraday volatility A sunny hour with high intraday volatility A sunny and windy hour 1 Excluding nuclear fuel tax 1 Source: RWE RWE Supply & Trading PAGE 21
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