08 Jan 2014 14:56:13 | edem

The coming 12 months will see a wave of subsidy reform across European electricity markets as states revisit the cost of supporting renewables, while market coupling will re-wire many of the region’s day-ahead markets. In the second of a two-part series, ICIS highlights key trends in 2014, this time looking at central, eastern and southern Europe.

Italy

•Italian power will integrate further with the rest of Europe in 2014 as Italy looks to couple its day-ahead markets with countries in central and south Europe (CSE). The project also includes, France, Switzerland, Austria, Slovenia and Greece.

Market coupling should increase imports and therefore lower Italian prices, although the net effect will not be immediate, according to market participants.

•A capacity payment top-up is planned to be implemented in the first quarter as Italian gas-fired power plants saw profit margins continue to shrink in 2013, with front month clean spark spreads decreasing by about 50% from January to December. The national electricity association Assoelettrica said that about 4-5GW of fossil-fuelled capacity could go off-line this year.

Moreover, some new plants have not yet started to work or are running at only 1,200-2,000 hours a year. Recent financial results from power and natural gas companies working in the Italian market highlighted their struggle to operate fossil fuel-fired generation plants profitably in existing market conditions. Germany’s E.ON is said to be seeking a buyer for its Italian assets while Italy’s Sorgenia is dealing with restructuring its debt.

•Meanwhile incentives for renewables plants will be limited in 2014. The feed-in tariff supporting photovoltaic power generation, known as the V Conto, ran dry last summer as the total amount of subsidies allocated to the industry was used. The Italian government has no plans to allow additional subsidies for new renewable plants, because it is seeking to reduce consumer bills. Experts said photovoltaic industry growth is now flattening, with grid parity expected within three years.

As for other renewable technologies such as wind, biomass and micro-hydro, some feed-in tariff auctions are continuing, but will represent half of what used to be the collective green certificates’ value. Green certificates are being phased out as the mandatory quota is gradually cut from last year until it hits zero in 2015.

The disappearance of green certificates together with lower gas prices on renegotiated take-or-pay contracts has had a bearish impact on Italian wholesale electricity prices and looks set to cause further discounts on Italian prices in 2014. This is to add to the macro-economic situation: Demand plunged by 2% year on year in November 2013, according to grid operator Terna.

•A major 200MW interconnector project linking Malta’s electricity grid connection with Sicily’s should become operational in 2014. The option to import electricity through the cable could lessen Sicilian power prices although experts are sceptical.

Czech Republic

•The main factor affecting spot and prompt trading throughout the Czech electricity market last year was renewable generation, particularly wind power from neighbouring Germany, which will continue into the new year. Additional supply will feed in from domestic renewable generation, which doubled to 2.9TWh in the second quarter of 2013, the most recent period for which data is available.

Poland

•One of the main drivers for price movements on the front year contract on the Polish electricity market during 2013 was decisions taken on the carbon back-loading law throughout the year. Emissions impacted the German front year price, and the Polish market followed the German equivalent. Additionally, Poland has had its own regulations that affected prices on the forward curve. From 2014 grid operator PSE will offer power generators funds urging them to become power reserves and balance the shortage in Peak hours. Traders believed the regulations will support the wholesale market.

•On the Polish spot, volatility that characterised the market in 2013 looks certain to continue. Poland increased its wind generation capacity by 272MW in the third quarter of 2013, reaching 3,080MW by the end of September. Polish traders agree that unexpected cuts to cross-border capacity from Poland were another significant volatility driver on the spot market, taking place mainly on exchange POLPX. This, according to regional traders, made the market less desirable to join the existing CEE market coupling, which could continue.

Hungary

•Concerns over the supply situation in the Hungarian market remain as hydro levels in the Balkans continue to drop. The Danube was reportedly at almost half its seasonal average level, but one source pointed to a lack of snow in the region as one of the main bullish factors pressuring water levels. “Snow is crucial to Q2. Right now there is no rain and the reservoirs are getting empty,” he added. However one trader pointed out that a shortage in the system is unlikely, citing a mild weather forecast over the remaining winter months and the country’s nuclear power plant Paks which ends its maintenance schedule in mid-January.

•Flows from Romania and Bulgaria are expected to increase since reductions in the export tariffs in both markets came into force on 1 January, but market participants have deemed the bearish signals from the additional energy in the grid as short-lived. Hungary is expected to be joined by Romania in market coupling with neighbouring Czech and Slovak markets in Q4 2014 (see EDEM 27 August 2013).

•Energy regulator MEKH is planning some changes to the renewable support system in Hungary in 2014. While unconfirmed, possible adjustments in the regulations would see green energy sold on the HUPX exchange which, according to sources, will increase traded volumes and potentially volatility on the exchange (see EDEM 20 December 2013).

Serbia

•Serbia should start its own exchange this year with the fourth quarter suggested as a possible launch window. Day-ahead exchange EPEX Spot would be supporting Serbian transmission system and market operator Elektromreza Srbije (EMS) in the project (see EDEM 19 December 2013).

Bulgaria

•Bulgaria’s balancing market is set to start full operations this year after the country adopted new electricity trading rules prescribed by the EU third energy package last year. The licensing of the balancing groups coordinators took longer than expected and was supposed to be complete by the end of last year. Grid operator ESO said it was ready to launch the balancing market once the licensing procedure was done but there is still no set deadline (see EDEM 31 October 2013).

•The start of the country’s long-overdue Day-ahead exchange should be a highlight of 2014, although it is still unclear which company will operate it. In June last year ESO said it was prepared to launch the exchange up to two months after the start of the balancing market but unexpectedly withdrew its application to become an operator in October. A month later a consortium known as Bulgarian Energy Exchange Shareholding submitted an application to organise an electricity exchange but an official approval by the energy regulator was not announced. In late December energy minister Dragomir Stoynev said an unknown, apparently state-owned enterprise called Bulgarian Independent Energy Exchange, was to launch the Bulgarian day-ahead exchange early in 2014. No further details were revealed ( see EDEM 19 December 2013 ).

Romania

•The Romanian electricity market will undergo a revamp as several developments are underway in the first couples of months of the year. OPCOM is aiming to launch the highly-anticipated over-the-counter platform on 1 February, following testing in January (see EDEM 3 October 2013). Market participants remain hopeful that the new platform is a step forward, easing trading and an improvement after the government banned all trading outside OPCOM in 2012.

Furthermore, OPCOM will implement several changes to its intra-day market, which include allowing transactions to take place up to two hours before delivery (see EDEM 11 October 2013). Until now, the intra-day platform ran for one hour with all trading activity ending at 14:00 CET the day before delivery.

•Energy regulator ANRE followed through with previous expectations on reductions to the country’s export and import tariffs and scrapped the zonal transmission tariffs in August, followed by a decrease in the cogeneration fee as of 1 January (see EDEM 2 January 2014). Market participants expect further cuts to the remaining component of the export tariff as Romania gets ready to join the market coupling project with neighbouring Czech, Hungarian and Slovak markets in at the end of this year (see EDEM 27 August 2013).

•More RES generation is expected to be connected to the energy grid despite recent cuts in support for green energy producers. Meanwhile, sources have said the regulator suggested the introduction of a feed-in tariff for small renewable installations in 2014 in a draft bill (see EDEM 22 November 2013).

Turkey

•Turkey’s electricity sector saw important changes in 2013. The merger of the retail and wholesale licences as well as the lowering of the eligible consumer threshold to 5MWh/year for households has created greater liquidity on the market, a feature that is likely to continue in 2014.

•Main expectations for this year relate to the launch of the cross-commodity spot exchange EPIAS which should take over from the existing PMUM, but whose shareholding and governance structure should include a large presence from the private sector. Although expected to become operational at the end of 2013, the launch of EPIAS has been delayed and could materialise in the first half of this year.

•The start of commercial flows from Georgia could see up to 700MW imported into Turkey later this summer. Georgian grid operator GSE has already published the net transfer capacity for the full year and is expecting applications from companies for the capacity by 10 January.

•Price-wise, although last year’s spot out-turns were bearish as consumption was subdued, a spike in demand caused by a cold snap in December renewed expectations of a rebound in prices this year. As a result, most companies expect Q1’14 Baseload to deliver at an average TL160.00/MWh, some TL21.00/MWh higher than the average delivery outturn for Q1 ’13 Baseload on the exchange PMUM. Similarly April prices, which have historically retained a large discount to March, have rallied, causing the spread between the two months to shrink. One reason could be an expectation for a gas price increase that may be enacted immediately after the local elections held in March.

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.