BIO Market News
European utilities are hedging their future electricity output more than at any time in the past five years as the longest slump in prices shows no sign of ending.
Power producers from Germany’s EON SE to CEZ AS of the Czech Republic sold an average 49 percent of output for 2015 as of March 31, compared with a 29 percent mean in the past five years, data from five utilities compiled by Bloomberg Industries show. Delivery in 2015 in Germany, Europe’s biggest market, is poised to drop as much as 11 percent in the next two months, according to Inenco Group Ltd., which buys energy for industrial consumers in 18 countries.
The rush by utilities to secure stable revenue underlines how German Chancellor Angela Merkel’s plans to increase solar and wind are hurting prices in Europe’s 430 billion-euro ($562 billion) power market. Margins at gas-fired plants slumped to their lowest level in four years last month as the renewable energy boom created a power glut at the same time that consumption fell to its lowest since 2003.
“Utilities are no longer betting on a quick recovery of power markets and are therefore not holding back volumes,” Patrick Hummel, an analyst at UBS AG in Zurich, said yesterday by e-mail. “Demand continues to be weak and power plant closures needed to re-balance the oversupply won’t happen quickly enough.”
German power for delivery in 2014, the European benchmark, has dropped for eight quarters, the longest decline since the contract started trading in June 2010, broker data compiled by Bloomberg show. It has lost 15 percent this year and was trading at 38.35 euros a megawatt-hour at 9:48 a.m. Berlin time. Power for 2015 and 2016, trading at about 38 euros, may fall to near 30 euros, said Hummel, declining to be more specific.
Statkraft SF, Norway’s biggest utility, will shut its 510-megawatt Landesbergen natural gas-fed power station in Germany this year because of a “bleak” economic outlook, the Oslo-based company said in March. Paris-based GDF Suez SA (GSZ), Europe’s largest utility by market value, has closed or mothballed more than 8,000 megawatts of capacity in Europe since 2009. A supply of 1,000 megawatts is enough to provide power to about 2 million European homes.
The German next-month clean-spark spread, a measure of the profitability of gas-fired plants, widened to minus 25.20 euros a megawatt-hour on May 31 and was at minus 23.20 euros today, according to data compiled by Bloomberg.
The five utilities tracked by Bloomberg Industries, which also include RWE AG (RWE), Verbund AG (VER) and Vattenfall AB, had sold 65 percent of next year’s production as of March 31, compared with an average 59 percent for year-ahead sales since 2008, the data show.
EON, Germany’s biggest utility, had sold all of this year’s output as early as September, according to the company’s third quarter earnings report. By December, it had sold all of its generation for next year, compared with 80 percent for the equivalent contract a year earlier.
“The fact that EON has hedged so much of its forward power production at this stage in the year shows that they are expecting power prices to fall,” Konstantin Lenz, the managing director of energy-markets adviser Lenz Energy, said June 4 by phone from Dusseldorf. Lenz has tracked European energy markets for more than 10 years.
The decline in power prices has been fanned by a European Union wrangle over how to address a record glut of carbon permits in the region. The European Parliament voted April 16 against a proposal to delay the sale of 900 million permits over the next three years and reintroduce them in 2019 and 2020 to stem the surplus. Carbon prices have tumbled 42 percent since the start of the year on ICE Futures Europe inLondon.
“For 2013 and 2014, everything has been hedged and for 2015 we keep hedging,” Marcus Schenck, EON’s chief financial officer, said on a May 8 conference call with analysts. “We are very bearish on the carbon price, and proved to be right, and that is why we have continued to hedge our position.”
The parliament’s environment committee is scheduled to vote on June 19 on an amended plan to remove carbon credits. A vote in support of the measure, known as backloading, would boost power prices, Gary Hornby, an energy markets analyst at Lytham St. Annes, England-based Inenco, said June 4 by e-mail. The company buys more than $2 billion of electricity and gas a year.
“If backloading is finalized, it will certainly support prices” for delivery several years ahead, he said.
An economic recovery may also boost power prices. Gross domestic product in the euro region will grow 0.2 percent in the fourth quarter, according to the median of 27 economists in a Bloomberg survey. That would be the first quarterly increase since 2011.
Renewable energy met a record 22 percent of Germany’s power demand last year, compared with 7 percent in 2002, according to data from BDEW, a utility lobby group, and energy research group AG Energiebilanzen e.V., both based in Berlin. The government seeks to have 35 percent of German power produced by renewable sources by 2020. An increase in electricity generated from wind and sun means power prices may extend declines, according to Robert Schramm-Fuchs, an analyst at Macquarie Group Ltd. in London.
“This could offset a potential carbon-price rally from backloading,” he said.