French traders fear uncertain year ahead for power-related commodities

By Darren Stetzel in London

Following a year of steady declines in the forward power market, French traders are approaching 2013 with some trepidation, pointing to the uncertain macroeconomic outlook and limited upside for power-related commodities.

According to Platts data, French baseload power for 2013 delivery ended the year Eur3.55 or 7% lower than the first full trading session of the year at Eur47.45/MWh by December 20, while the peakload contract was down Eur3.80 or 6% at Eur60.20/MWh.

Year-ahead baseload power prices averaged Eur55.87/MWh in 2011, compared with Eur50.61/MWh in 2012, a difference of Eur5.26 or 9%. (See related chart: French year-ahead baseload (Eur/MWh): January 3 - December 31, 2012).

"Prices feel rather low at the moment, so I don't think it will be a repeat of 2012 with prices falling most of the time. At the same time, where is the upside going to come from? I don't expect any big economic improvements, nor much upside in coal and gas," one power trader at a major utility said.

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A second trader said that following demonstrations across Europe against governments' austerity measures, macroeconomic developments would continue to affect the wider energy market in 2013.

Whether those developments will be recovery or further demise remains unclear.

European energy demand was dampened by the economic situation in 2012, and the spread between coal, gas and carbon prices meant that generators switched to using coal-fired output, with many gas-fired plants sitting unused for long periods.

France made strides over the year toward replacing aging oil-fired generation as well as coal-fired plants to conform with EU regulations, but few gas-fired plants are being built.

Concerns over the low usage of gas-fired generation have been raised across Europe, with some producers claiming that gas plant is not profitable due to the organization of the market.

Capacity market uncertainty

Uncertainty over plans for a future capacity market dominated the power agenda for much of 2012 after Socialist presidential candidate Francois Hollande announced his opposition to secondary capacity mechanisms during the election campaign and again after taking office in May.

The uncertainty hit France's Poweo Production which plans to build two 450 MW gas-fired units at Hambach, northeast France. The company said these plans were at risk of stalling if the Socialist government failed to indicate support for a secondary generation capacity market.

The government said it was worried a capacity market would push up prices through speculation while French energy regulator CRE said that higher prices would be justified "on a long-term perspective" due to rising power demand across peak periods.

Peak demand breached 100 GW for the first time during the February 2012 cold snap.

In December the government finally announced measures to address the looming supply-demand gap.

The office of French environment/energy minister Delphine Batho said that the government had promulgated a decree setting up a framework for its own electricity market capacity mechanism designed to stem growth in peak demand.

Under the decree, power plant operators will be remunerated for availability as a measure to increase supply security, and consumers will be rewarded for accepting supply interruption during peak periods.

The ministry said the decree requires electricity suppliers to justify, beginning in 2015, that they can meet their customers' peak demand, thus making them responsible for measures to ensure a supply-demand balance.

Peak demand has grown faster than overall electricity consumption in France, about 3% annually, with a 28% increase over the past decade.

As peak demand is often met by firing up fossil-fuel plants, the measure to dampen peak demand is designed not only to save money but also to reduce carbon emissions, the ministry said.

Progressive energy tariffs not yet agreed by Parliament

Since his election in May, President Hollande has set out ambitious energy objectives including reducing the share of nuclear power generation from 75% to 50% of total output by 2025.

Hollande wants renewable energy to fill the supply gap, and Prime Minister Jean-Marc Ayrault told parliament the government was committed to supporting a "massive" energy efficiency program, and "ambitious" renewable power objectives.

To achieve this, the Socialist government has been seeking to implement new "progressive" tariffs for power and gas, which are set to promote responsible consumption and renewable power.

France's Senate has yet to approve the government's energy tariff bill, however, amid continuing opposition from center-right UMP and Communist party members.

The bill, agreed early October by France's lower house, would fundamentally change the way French households pay for gas and power, charging different rates according to usage, geographical location and age of occupants.

A cross-party committee of senators voted October 23 that the bill was "unreceivable" after a blocking motion was filed by Communist senators.

This motion was upheld by the upper house after a long debate. The bill is now set to head to a joint committee of senators and MPs who will try and hammer out a text suitable for both houses.

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