Volatility, risk, and risk-premium in German and Continental power markets

Transcription

1 Volatility, risk, and risk-premium in German and Continental power markets Stefan Judisch Supply & Trading GmbH RWE Supply & Trading PAGE 0

2 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

3 Various fundamental factors influence power prices on the long-term forward market Fuel forward curves A CO 2 prices Gas prices Crude prices Coal prices Reservoir level Subsidies & technical progress Reservoir hydro plants Wind capacity growth PV capacity growth B Renewable power generation Marginal costs of thermal plants Thermal power generation Power price Available capacity Power plant new build Power plant closures Supply C Cross-border exchange balance Seasonal temperature forecast Air conditioning / Electric heating Residential demand Comfort of living Weather impacts Industrial demand Energy efficiency Demand Macro cycle D RWE Supply & Trading PAGE 2

4 A B C D With the exception of coal, energy prices moved mostly sideways over the last two years CO (EUR/EUA) As of March 2014 Coal Cal2014 (USD/t) TTF Sum2014 (EUR/MWh) German Power Cal2014 (EUR/MWh) (coal at the margin) RWE Supply & Trading PAGE 3

5 A B C D Recent energy price developments continue to move sideways CO (EUR/EUA) As of August 2014 Coal Cal2014 (USD/t) TTF Sum2014 (EUR/MWh) German Power Cal2014 (EUR/MWh) (coal at the margin) RWE Supply & Trading PAGE 4

6 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

7 A B C D For a number of thermal plants the energy only market is no longer viable Closure announcements are cause for concern Plant additions and closures in Germany (MW) 1 > Based on current 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

8 A B C D While there is sufficient capacity right now, additional plant closure announcements will eventually tilt the system MW 2013 Until Mothballed plants Decommissioning according to BNetzA Nuclear capacity to be decommissioned until 2023 > The BNetzA s view on security of supply has been assessed starting from 2013 figures and adding known capacity changes (net capacity development is negative to 2018) > To ensure security of supply TSO s will require 5 GW capacity margin above expected load for every hour > In this assessment mothballed capacity is assumed to contribute to security of supply as it can be reactivated when necessary Remaining capacity incl. capacity from abroad (AT, LU) IED-related decommissioning 1 1 IED - Industrial Emissions Directive 1 Source: BNetzA (July 2014) without newly announced RWE closures > Without any additional decommissioning, security of supply will not be seen as endangered (much) before 2018 > Assuming that the regulator wants to maintain 5 GW capacity margin to cover forecast errors additional 3-5 GW plant decommissioning would intensify the discussion on security of supply RWE Supply & Trading PAGE 7

9 A B C D E.ON announced early nuclear shutdown RWE Supply & Trading PAGE 8

10 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 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Source: Entso-E Power Consumption (preliminary hourly data) RWE Supply & Trading PAGE 9

11 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

12 The power price development over the last twelve years in Germany show Forward versus spot prices (EUR/MWh) Cal 02 Cal 03 Cal 04 Cal 05 Cal 06 Cal 07 Cal 08 Cal 09 Cal 10 Cal 11 Cal 12 Cal 13 Cal 14 Spot d spot moving average RWE Supply & Trading PAGE 11

13 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 03 Cal 08 Cal 04 Cal 09 Cal 05 Cal 10 Cal 06 Cal 11 Risk premium (right scale) Cal 12 Cal 13 Cal 14 Spot d spot moving average RWE Supply & Trading PAGE 12

14 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) German power baseload 2 Implied Cal as weighted average of spot settlements and balance-of-year forwards RWE Supply & Trading PAGE 13

15 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) RWE Supply & Trading PAGE 14

16 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 Trading year 2012 Trading year 2013 Trading year 2014 Year 2 Year 3 CDS Cal Base load ( /MWh) (assumed thermal efficiency: 36%) Average CDS Cal CSS Cal Peak load ( /MWh) (assumed thermal efficiency: 49%) Average CSS Cal Something has got to give! 1 RWE Supply & Trading, prices until 25 February 2014 RWE Supply & Trading PAGE 15

17 Germany s oversupply is dragging adjacent markets lower as long as there is sufficient border capacity Germany Netherlands UK Poland France European power prices (EUR/MWh) Capacity constraint Capacity constraint > European power price convergence until 2012 > Since then prices diverged > In the Netherlands and UK gas-fired power plants mostly set prices; whereas in Germany, France and Poland cheaper coal-fired plants are price setting > Renewable additions exceed the extension of cross-border capacities > Germany is increasingly no longer able to export its surplus renewable power production RWE Supply & Trading PAGE 16

18 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 1 Front year baseload 2 Day-ahead baseload RWE Supply & Trading PAGE 17

19 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 Day-ahead trading: 94 Intraday trading: 89 Market participants in 2013 Day-ahead trading: 208 Intraday trading: RWE Supply & Trading PAGE 18

20 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

21 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

22 German merit order in 2013: prices and volatilities for different hours of the year Marginal cost (EUR/MWh) Renewables Nuclear 1 Lignite Coal Gas Oil Others A sunny hour with high intraday volatility A sunny and windy hour Capacity (GW) A average hour with low intraday volatility A cold winter hour with low intraday volatility A winter hour with high intraday volatility Announced for closure or closure candidates System services 1 Excluding nuclear fuel tax 1 Source: RWE RWE Supply & Trading PAGE 21

23 What will happen over the next five years? More renewables: merit order will shift further to the right > More fuel switch coal to lignite > Lower prices > Higher spot volatility Plant closures will accelerate > Capacity ranges for coal and gas in merit order will shrink > Gas will be running more often > Higher prices > More price spikes (spot/intraday) > Higher spot and then higher forward volatility > Re-appearance of risk-premium in forward prices Rise in gas and/or CO 2 prices > Higher prices Source: RWE > Higher forward volatility RWE Supply & Trading PAGE 22

24 Volatility, risk and risk premium is moving along the curve in the course of time > Volatility and risk in German and Continental power markets have moved to the very front end of the curve > This development led to backwardation of long-term contracts > During the last decade seasonal patterns became more pronounced: As a result generators react with seasonal mothballing > Such cycles can also be observed in other markets RWE Supply & Trading PAGE 23

25 Experiences from other markets prove as well that risk premiums fluctuate USA: Back and forth shifting of the risk premium in PJM power market Spread between forward and spot prices (USD/MWh) Result of the bull market in fuels......and corresponding correction of prices Forward 1 Spot 2 Risk premium (right scale) The reduction of risk premium was also a supply glut due to rising shale production Rolling front calendar year for that day 2 365d spot moving average RWE Supply & Trading PAGE 24

26 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 25

27 Summary & conclusion 1 What are the market fundamentals telling us? > Prices for fuel commodities and CO 2 are drifting sideways > Despite reduction in subsidies, solar and wind generation will continue to grow in Germany > From 2015 onwards plant closures will reduce the current generous capacity margin > Electricity demand will drift sideways at best (assuming no major break-through on electric cars) 2 What can we observe in the traded market? > The markets assume that renewable generation capacity will grow faster than thermal plants are being closed > Lower dark spreads would signal to plant operators that their capacity is no longer required > More than 70 GW of renewable capacity in Germany push up intra-day volatility; sufficient flexibility in the system for the time being but more and more closures of conventional capacity will lead to spikiness in spot and intraday markets 3 How will future developments impact merit order economics? > Forward volatility is low right now as (1) coal plants are mostly price setting in average weather (assumption of forward market), (2) the volatility of coal is low > Spot/intraday volatility has gone up and is expected to rise further > Forward volatility likely to be pushed up if intraday price spikes become more frequent 4 Conclusions > Price to drift sideways for a while before markets tighten > More short-term price spikes will induce rising forward volatilities and risk premium and a change in hedging behaviour of large power consumers RWE Supply & Trading PAGE 26