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Yr-2021 power contracts: Massive market movements, uncertainty and COVID-19 recovery

Eylert Ellefsen
Archived blog post. This blog post has been transferred from our previous blogging platform. Links and images may not work as intended.

Energy Quantified (EQ) has reviewed how the Yr-2021 outlooks have changed during the Coronavirus period. Here we focus on Germany, France, Italy and Spain.

The Corona-epidemic hit European society and power markets hard. As lockdowns were introduced in most countries across Europe in March, the power consumption, CO2-market and power prices dropped significantly. With incrementally eased lockdown measures in May and June, the power markets have progressively climbed back towards pre-Corona levels. Meanwhile, other incidents have also contributed to strengthening the markets.

Consumption

The four countries Germany, France, Italy, and Spain, represents about 60% of the electrical consumption across Western Europe. The consumption fell ~15% for April for these countries compared to last year. Below you can see the consumption drop so far in 2020 compared to 2019. We see a good trend in the recovery, and July had only a ~6% reduction from the 2019-numbers.

Consumption reduction in 2020 compared to 2019 for Germany, France, Italy, and Spain combined (percentage).

Power market and fuel prices for Yr-2021 base

See table below for fuel- and power- market prices for Yr-2021 by the end of the month since January:

Fuel- and power market for Yr-2021 by the end of each month. January to July 2020.

The main fuel driver has been the CO2 market that moved downwards until April due to the financial situation and the consumption decrease. Later, we saw a significant recovery as the financial exchanges bounced back, and the consumption increased from May to July. Alongside the carbon price, we saw falling coal- and gas-prices during March-April. The short-run marginal cost (SRMC) for coal and gas fell about 15% at their lowest during March-April compared to pre-Corona prices.

The coal market rebound from the start of June was initiated by the news of issues with the Russian supply due to reduced railway capacity. The gas market is, by the end of July, still at levels seen at the end of March.

See the market prices for Yr-2021 at the end of each month since January charted below. If you look carefully, you see how similar the prices are at the end of July compared to the end of February (±1.0 €/MWh) - except for Italy, whose prices are down ~3 €/MWh.

Power market prices Yr-2021 by the end of each month for Germany, France, Spain and Italy (€/MWh).

Apart from falling consumption due to COVID-19, a significant price driver has been the French announcement of reduced nuclear production in Q4-2020 and Yr-2021.

It's interesting to see how the price difference between France and Germany has developed since February, and also to compare the short-run marginal costs.

Price differences for Yr-2021: French and German power futures, and German futures compared to the short-run marginal cost of coal.

Notice how the price difference increased from 2.21 €/MWh in February to the maximum of more than 8.0 €/MWh in May, and rebound to 4.58 €/MWh by the end of July.

These are quite massive movements on yearly contracts. In this case, the narrowing prices lately (July) can also be explained by final closure plans of German coal-fired fleet during Q4-2020 and Yr-2021.

We see from the rightmost column in the table (Diff DE FUT - SRMC Coal) how the German Yr-2021 prices have moved much closer to the SRMC for coal lately (only a 0.10 €/MWH difference in July).

An exciting market

The market outlooks for 2021 are very exciting with uncertainty about French nuclear capacity, effects of German coal-fired and nuclear phase-outs, and consumption and financial recovery from COVID-19. In addition, there is an upward potential for both CO2 and gas prices. Energy Quantified (EQ) follows the situation carefully and will continue to publish blog posts on these matters.

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