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:
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.