The Evolution of the Central Western European Power Market

The Evolution of the Central Western European Power Market
Blog April 11, 2019

As forces of change accelerate in the power and utilities sector, utilities are tapping into new technologies to serve increasingly sophisticated customers and improve operational efficiencies. Despite the market appetite for technology, regulatory structures need to catch up for the industry to meet evolving customer expectations. Here at Genscape, we looked at how much and how fast the industry is changing and what the near future will look like.

Despite past stability in the electricity market in Central and Western Europe, we identified several trends changing the energy landscape. Firstly, technology offers new opportunities for improving operations. We expect efficient plants to stay in-the-money whilst the inefficient ones will be pushed out of the merit-order fuel stack. Furthermore, renewable generation will account for a growing chunk of the power mix, for most – if not all – European countries. Pressure on generation margins will keep accelerating, causing the coal-fired plant’s margins (dark spread) and gas-fired plant’s margins (spark spreads) to tighten. At the distribution level, we expect imbalance of consumption and generation to remain a challenge, causing an increasing number of dispatching incidents. Finally, Demand-Response will increasingly allow generators to optimize demand instead of focusing on supply optimization only.

Recently, we built scenarios using EPSI, our proprietary fundamental forecasting software. The forecasting horizon spans from medium-term (2020) to long-term (2040) and the prices displayed in Figure 1 below are the yearly average of day-ahead prices. In the forecast for the year 2020, France’s yearly average of day-ahead prices is at EUR45.80/MWh, which is under Germany at EUR47.70/MWhr.

Genscape's price forecast in different EU countries
Figure 1: Genscape's price forecast in different EU countries

This is because French marginal plants are mainly nuclear plants as opposed to Germany’s, which are lignite or coal plants. Conversely in the forecast for 2040, Germany prices at EUR53.80/MWhr, which is below France at EUR54.10/MWhr, and the lowest in the European countries referenced in Figure 1 below. Our assumptions consider the composition of Germany’s merit-order stack, which we expect to mainly consist of renewables. Figure 1 below shows our results.

To better understand the price forecast, we analyzed the merit-order of each country referenced in our scenarios, for 2020 and 2040. Below, Figure 2 and 3 are two examples of the evolution of the merit-order in France and Germany.

Evolution of the merit-order stack in France between 2020 and 2040
Figure 2: Evolution of the merit-order stack in France between 2020 and 2040

 

Evolution if the merit-order stack in Germany between 2020 and 2040
Figure 3: Evolution if the merit-order stack in Germany between 2020 and 2040

The shape of the stack in France in 2020 looks like that of Germany in 2040 despite their entirely different composition. On the one hand, the stack in France in 2020 is mainly comprised of nuclear power, whilst on the other hand Germany in 2040 is mostly renewables; still, both have low marginal costs. In both cases, the “marginal plant” – the plant that sets the day ahead prices for a given hour - comes from imports from neighboring countries.

 

In France, due to the nuclear capacity reduction and the coal phase out, only efficient gas plants will be in-the-money. In Germany, due to the coal phase out and increased renewable capacity, gas will be out-of-the money and imports from eastern Europe will increase (CEE countries have extensive lignite and coal-fired generation).

As the energy landscape keeps evolving, Genscape’s power analysts continue to look closely at the market. The EPSI platform allows us to evaluate the supply and demand fundamentals of the market to assist clients in capitalizing on opportunities and managing risks. To learn more about the EPSI platform, click here.