07 Jan 2014 18:07:56 | edem

This year is deadline year for the EU’s day-ahead market coupling project, with north-west Europe to launch on 4 February and south-west Europe expected to synchronise in March. The complex, multi-party programme has been years in development, and a successful outcome would be a big step towards the EU’s long-term goal of a single electricity market. In the UK, domestic developments also present 2014 as a year of reform. In the first of a two-part series, ICIS highlights key trends in the year to come, first looking at northern- and western-European markets.

UK

The coming 12 months could prove pivotal in the evolution of the UK power market, as regulator Ofgem’s liquidity intervention – which has ultimately been years in development – finally results in concrete action.

Beginning 1 April the Big Six suppliers will be forced to market-make on a range of products out to the fourth season on the forward curve during two hour-long trading windows opening at 10.30 and 15:30 London time. Ofgem has not prescribed a platform, leaving the market to decide where to fulfil the obligation.

The move comes at a time of strained liquidity on the UK electricity market, as non-physical participants scale back or cease trading operations altogether amid an increasing regulatory burden and a lack of demand from traditional clients. The most recent is Bank of America Merrill Lynch (see separate story).

•In addition, the GB hub day-ahead price, a uniform volume-weighted figure accounting for activity across both UK power exchanges APX and N2EX, is scheduled to launch on 4 February as part of the NWE market coupling project.

•And on top of this, with the last year’s energy bill now this year’s energy act, the contracts for difference (CfD) subsidy model for low carbon generation – the cornerstone of electricity market reform – will see its first applicants towards the end of the year.

How the model will affect the wholesale power market is still up for debate. Some traders expect a stifling of liquidity on forward contracts, while others have argued that CfDs will bring smaller players to the market by allowing them to enter into long-term power purchase agreements not previously accessible (see EDEM 18 March 2013).

Germany

•Politically, 2014 is decision time for the German electricity market with subsidy reform for renewable power set to be passed in the summer. This could bring clarity over potential capacity payments for conventional power plants, which would pave the way for more plant decommissioning.

•Fundamentally, there is no indication that bearish pressure on German power prices will be less in 2014 than it has been in recent years. For the first time, significant amounts of offshore wind power generation will hit the grid in 2014, when 1.6GW is due to be commissioned on top of 520MW already in place. With potentially more than 4,000 full load hours, a more steady influx of cheap electricity can be expected. Also, more hard coal plants are due to start commercial operations this year.

Net conventional capacity growth of 3.2GW is forecast across all technologies this year before a net loss of 1.2GW is expected over the years 2015 and 2016.

•However, forward power prices have already fallen so low that the protection they might have offered utilities that hedged at higher prices over previous years is slowly running out. German utility RWE said last year that a power price of €35.00/MWh would bring even nuclear plants to “the edge of profitability.” So 2014 could be a year of tough decisions for financially pressured power generators.

In addition, the key power generation cost factors, hard coal and carbon emissions, seem to have found a floor. European forward coal prices fell to around, around $81.00/tonne but analysts agreed that a significant recovery is unlikely before the end of 2014.

France

•French energy regulator CRE is expected to select the winning bidders in the country’s second offshore wind power tender before the end of this month. Paris-based energy group GDF SUEZ and French incumbent utility EDF have placed competing bids for each of the two 500MW sites on offer. The tender may redress the imbalance created by the first tender, launched in 2011, in which EDF secured three of five sites on offer while all four of GDF’s bids were rejected.

In the second tender, GDF is in consortium with Portugal’s EDP Renewables, French renewable project developer Neoen Marine and French manufacturer Areva. EDF is in consortium with German wind park developer WPD Offshore and French engineering company Alstom. The government expects the projects to be operational in 2021-2023.

•CRE is expected to decide on whether to change the level of the ARENH tariff at which electricity incumbent EDF is obliged to make a quarter of its nuclear generation capacity available to competing suppliers after March. The tariff will only change after publication of a decree determining whether its method of calculation will be based on EDF’s accounting or economic costs, which is expected before the end of March.

The methodology chosen will determine whether EDF’s nuclear plant life extensions, which some expect to be granted, will make it possible for the tariff to be lower by allowing amortisation costs to be spread out over more years, analysts have said. France’s nuclear watchdog will only decide whether to grant extensions in 2015, but confidence they will be granted could influence the new ARENH tariff, say analysts.

The ARENH tariff was introduced as a market liberalising measure and has been at €42.00/MWh since early 2012. Traders said a lower ARENH would be a negative signal for the market.

The tariff acts as both a support and a cap on traded power prices. If prices fall below ARENH, previous ARENH buyers come to the market, pushing wholesale prices up to the ARENH level. If market prices rise far above the tariff, the lower ARENH tariff takes liquidity away from the market.

•France’s wind power producers could face a period without subsidies if France’s highest administrative court, the Conseil d’Etat decides that the feed-in tariff they receive constitutes state aid, making the tariff illegal. The court is expected to make its decision sometime this quarter.

Wind power producers would then have to wait until a new feed-in tariff is notified to and approved by the European Commission and will have to sell their power at market prices in the interim. It is unclear how long this will take.

In accordance with EU legislation, any form of state aid must be notified to the European Commission and will receive approval only if it is consistent with another target set by the EU, like increasing the share of renewables in the energy mix. As France did not notify the commission of the existing wind power feed-in tariff, it would be annulled if it is considered state aid.

Netherlands

•The Netherlands will introduce weekly auctions for electricity producers to sell reserve capacity to the grid operator TenneT from 13 January. The new system code will replace a previous model under which generators had to hold back 1% of capacity as reserve without payment, and TenneT believes this will lead to lower wholesale electricity prices.

•The Netherlands is considering expanding cross-border capacity to Germany in a bid to access greater volumes of cheap renewables-backed power from over the border while maintaining parity between electricity prices between both markets. An assessment of the situation is expected to be delivered by TenneT within the coming months.

Nord Pool and Baltics

•As planned, Nordic day-ahead exchange Nord Pool Spot launched a new bidding area in Latvia on 3 June and a new intra-day market for Latvia and Lithuania on 10 December. However, the road to further integration of the Baltic countries remains bumpy amid frequent price spikes due to congestion between Latvia and Lithuania and capacity shortages. Grid expansion and long-term hedging products for interconnectors have been named by market participants as bringing possible relief, particularly a third link between Estonia and Latvia.

•Nord Pool Spot said it would reinstate flexible hourly offers before the launch of NWE price coupling project, with launch set on February 2014. The Nordic exchange suspended flexible hours after a failure to calculate Day-ahead prices on 4 August last year, related to the algorithm’s handling of flexible hours near the resulting system and area prices.

Norway

•The 700MW Skagerrak 4 interconnector between Denmark and Norway is scheduled for completion later this year. It is expected to boost renewable energy flows, including wind from Denmark and hydro from Norway. In addition, an investment decision on the 1.4GW interconnector with the UK will be made this year, according to grid operator Statnett.

•Hydropower remains the main driver for electricity prices in Norway, and Statkraft announced an investment of €236m for 2014 in upgrades and maintenance of ageing hydropower plants.

Sweden

•Sweden said in December it has reached its share of renewable energy targeted for 2020 seven years ahead of time, but it is not resting on its laurels. The country seeks to drive forward further domestic grid improvements and expansion, as well as moving forward with the 700MW NordBalt cable with Lithuania, which is slated to come online in 2015.

•Sweden’s energy regulator is working with the respective counterparties to remove barriers to further market integration and align long-term hedging opportunities on interconnectors such as financial transmission rights or physical transmission rights.

•Upgrades to Swedish nuclear power plants have already brought on a capacity improvement of 30% in 2013, and further maintenance and modernisation of the OKG-operated Oskarshamn 2 reactor is expected to add capacity in the fall of 2014.

Finland

•Finnish TSO Fingrid and its Estonian counterpart Elering successfully completed the first test phase of the 650MW EstLink 2 interconnector. The cable is due to be fully commissioned by 6 February, however, capacity during the trial period has already been made available to the market. Also, a permanent capacity reduction of 20% on the 550MW Fenno-Skan 1 cable may be decided upon before September 2014.

•Changes in area price differences in the Nordic region and Russia have given an incentive to export electricity from Finland to Russia. These are set to begin in 2014 on a newly converted 350MW bi-directional cross-border link. Additional capacity will depend on market developments, according to Fingrid.

•After the conclusion of a plant supply contract between Rosatom subsidiary Rusatom Overseas and Finnish power company Fennovoima in December, a final investment decision on the Hanhikivi 1 nuclear power plant in Pyhajoki is expected in 2014. In addition, Finnish utility Fortum is scheduled to take the 1GW coal-fired Inkoo power plant offline in February 2014.

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