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German Cal 14 baseload power drops below 42 euro per MWh

By Benedict De Meulemeester

By Benedict De Meulemeester on 23/01/2013

It was the summer of 2005 and we had just created E&C, a brand new energy procurement consultancy focused on servicing clients in taking energy price fixing decisions. The price of year ahead electricity in Belgium rose above 50 euro per MWh. Our phone was red hot with clients in panic. Such price levels were unsupportable! Little did we know then that this was just the beginning of an uptrend that would culminate in baseload prices near 100 euro per MWh in the spring of 2008. Then came the crisis and a sharp correction of the energy markets. As soon as the price dropped below 50 euro per MWh, every client wanted to fix. What seemed like a nightmare price level three years before was now generally described as “an opportunity we don’t want to miss”. And when in the spring of 2011 and in the wake of the Fukushima disaster baseload power prices in North-Western-Europe jumped back above 60 euro per MWh, everybody was so sad for not having fixed more at levels around 50 euro per MWh.

Today, the Belgian Cal 14 baseload has traded at 44,5 euro per MWh. And late in the afternoon, our jaws dropped as we saw the German Cal 14 baseload contract drop below 42 euro per MWh and as low as 41,7. Who would have thought that within less than two years we would see such historically low prices, when in March 2011, Frau Merkel announced the shutdown of seven nuclear power plants? If anything, today’s prices are once again reminding us of the fundamental unpredictability of energy markets. The only thing you should expect in energy markets is the unexpected. The clients I speak to these days can only express disbelieve. Is this possible? Yes, it is, and it is happening right now. Moreover, there are solid reasons for power prices to drop so low:

  • Coal prices have dropped back below 100 dollar per ton. There are two main reasons for this. The first one is the increased (shale) gas production in the US. Across the Atlantic, power producers have switched to gas-fired production. Excess American coal is flooding the world markets. On top of that, China has started to import less coal as it is expanding its coal production.
  • Demand for power is in a steadily declining trend. This is obviously due to the weak economic performance in Europe. But that is not the only reason. Heavy energy intensive industry moving out of Europe is another cause. And I am convinced that the declining demand is also a result of Europe’s climate change commitments. Just think about the lamps you currently buy. They consume just ten percent or even less of what you frequently bought eight years ago. We also observe that many industrial power consumers have gone through effective power consumption reduction programs.
  • Increasing production of renewable energy is another reason for declining power markets that is to be attributed to climate policy. It is not a coincidence that Germany, with its continuing expansion of renewable power production is currently at the lowest level. MWh’s produced with windmills or solar panels have a zero marginal cost and their increasingly massive presence on the grids causes overall price levels to decline. And despite the fact that in many countries the subsidies to install renewable technology have been reduced, the growth of renewables continues.  Solar panels are claimed to have reached grid parity. Thanks to the rapid decrease of the price of the technology, residential consumers in many countries now no longer need any subsidies to earn money with the panels they mount on their rooftops.
  • The declining price of emission rights is an example of how European climate policy has failed. In the EEX spot market emission rights have been trading below 5 euro per MWh this week. As everybody starts to realize that the European Union is not capable of solving the problem of over-allocation, will we see that price drop back to levels near zero?

The downtrend is strong, supported by fundamentals and is still going on. Of course, at any time something can happen that makes the downtrend turn around. Emission regulations could oblige power producers to shut down coal-fired plants. Or the failure of emission rights trading might be compensated with the introduction of carbon taxes, like we have seen in the UK. Or demand for power might pick up in a strong economic recovery, something we all hope for. Or more nuclear power plants might be shut down in the wake of some safety incident. At this moment we can only recommend to keep yourselves ready to fix prices when this fine downtrend comes to an end. In the meantime, “don’t catch a falling knife”. So many clients are unhappy today for fixing too much of their 2014 prices at levels just below 50, as they esteemed that the market would never drop much lower than that level. Again, their expectations about the market trumped them. So, don’t think you are dreaming, the price in Germany really has dropped below 42 and the downtrend continues.

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