The winter ahead will see a perfect storm hit power markets. Geopolitical factors such as war in Europe and the continuing effects of Covid are affecting markets; power supplies are under pressure; and the ramping up of variable renewables are set to combine to make markets more volatile. Even the most experience traders are bracing themselves for the test.
New record prices predicted
Volatility in the macro economy means both power and gas prices are rising and more volatile. Bloomberg notes that German year-ahead power prices on the European Energy Exchange more than doubled in the two months to mid August, from €225 to €475/MWh and have seen a six-fold increase from well below €100/MWh over the past year. But that is just the background: going into the winter, linked gas and electricity markets are in the type of new territory that sees market watchers post new record prices on social media.
The macroeconomic factors are visible to anyone. Gas represents over 20% of European energy consumption, with Germany and Italy the largest importers in Europe. The biggest use is heating (40%) but its use in power generation comes second and has increased by 15% since 2000, according to ACER.
Russia’s invasion of the Ukraine means that gas from Russia – a major supplier for most much of Europe – comes freighted with risk, if it can be used at all.
It illustrates the huge single risk inherent in a pipeline that brings fuel from an unreliable source. Russian supplies have dropped to near zero and what remains is technically challenging, politically distasteful and subject to new constraints such as on payment methods, thanks to sanctions.
LNG is not a quick fix
Other sources of gas are available and Europe is scrabbling to open up alternative delivery routes, notably in the form of new LNG terminals to gain access to global cargoes. But traders know that even in normal years global LNG supply chains are complex and risky, with more variables at play than with fixed pipelines. They require availability of vessels, port infrastructure and offtake capacity – all while Europe is in competition with global customers to secure supplies. Supply changes can happen in short order – like Germany’s decision in May to charter four LNG regasification terminals, and in August to add a fifth terminal.
Competition and drought create pressure
As for competition, that will be fierce. Just 36% of gas is used to generate power, according to ratings agency S&P Global. It says other major users include property and heating (22%) and, crucially, industry (39%) – which includes chemicals and fertiliser suppliers for which gas is a feedstock and demand is not elastic. Traders will have to act fast to get best value.
Other factors affecting the market are known throughout the power sector. Drought has reduced the ability of generating companies to run both French nuclear plants and German coal plants. Crucially, it could also place a limit on supplies from the hydro power plants in Norway that play a key role in near term balancing for itself and its neighbours, according to statement to the Norwegian parliament by Oil and Energy Minister Terje Aasland. And this comes as weather-dependent renewables play a larger role.
Traders are on notice: companies face going out of business
What is more, energy prices are the headline cost issue for businesses and consumers who are feeling the economic pinch. That has to put traders on notice: companies will go out of business, whether they are power buyers or sellers. Political decisions will be taken that can cause the market to swing – already we have seen discussion of limits to interconnector pricing, the German government coming to the rescue of Uniper, plans floated to halt shutdowns of German nuclear and UK coal, and windfall taxes proposed for various types of energy companies. Policymakers are sometimes slow-moving – but this winter, they will be called on to act fast and the market will react to rumour – something we are already seeing in the GB with the new prime minister and retail prices.
Alongside these variables influencing prices run structural changes in power markets.
Past tight winters were not traded with thousands of market participants, each with as little as 1 MW to be bought and sold, and new products like the demand flexibility services currently under consultation by the GB system operator NGESO. This winter traders need to be able to assess and analyse much more information, to manage risk and to have immediate access to their P&L position. It is an explosion of data sources – too much for a single screen and a visual overview – and the ability to tap into it is one of the key tools that will allow traders to get best value in the winter coming.
Traders need to tools to capture value fast right now
It is the kind of challenge Brady’s suite – Igloo, CRisk, PowerDesk – is ready to meet.
Brady has been providing tools to traders in fast-moving markets for years. Its users can rely on it to qualify and automate data. PowerDesk is the tool that will allow you to capture value fast and it is ready for use in 15-minute markets. You can be proactive: you can trust your data, display it in the way you need and can make fast decisions. Igloo ETRM will speed up your connection to exchanges and markets across Europe and support your risk management. CRisk gives you deep insight into your credit risk position.
Most importantly, the software packages are market-tested and ready to install now.
Traders are bracing themselves for perhaps the bumpiest winter they have ever traded through. This is not a time to ‘wait and see’. It is time to make sure the best of the market is at your fingertips.
Written by
Chris Regan
Business Lead – Energy STP
About Brady Technologies
Brady Technologies (‘Brady’) provides trading, risk management and logistics software solutions to energy markets. We help energy trading participants to profit in new ways from the green transition and support ESG requirements.
Our heritage in European energy spans over 30 years. Our customers comprise some of the most renowned energy organisations in Europe, engaged in financial and physical trading on major exchanges including Nord Pool, EPEX, CME, Nasdaq and ICE, as well as OTC.
Brady solutions cater for utilities, independent power producers, asset developers, asset optimisers, energy traders, oil & gas companies, commercial aggregators and hedge funds, helping to optimise trading performance, drive greater visibility and cost control across the trade life cycle.
References:
https://www.acer.europa.eu/gas-factsheet
S&P Ratings Report: Ratings Direct: Energy Transition: Gas’ Role Varies By Sector And Region Amid Security Of Supply Concerns July 20, 2022
