(BN) Power Premium Falls as France, Germany Converge: Energy Markets


Power Premium Falls as France, Germany Converge: Energy Markets
2010-11-25 09:43:25.948 GMT

By Lars Paulsson
Nov. 25 (Bloomberg) -- The extra cost to buy French
electricity compared with Germany's is shrinking as the European
Union moves toward a single power market for the continent.
French electricity for delivery next year traded at as
little as 1.30 euros ($1.73) a megawatt-hour more than the
equivalent German contract yesterday, the smallest difference
since February, according to data compiled by Bloomberg based on
broker prices. That compares with this year's high of almost 4
euros on May 17 and an average of 2.50 euros during 2010. The
spread traded today at 1.75 euros.
The falling premium shows how the system of so-called
market coupling, which routes electricity to where prices are
highest, is making Europe's power market more competitive as the
EU moves toward a unified system by 2015. Day-ahead power for
France and Germany, the region's biggest consumers, converged on
Nov. 9, the day the nations were coupled for the first time.
"Germany will move closer to France as now there will only
be one physical market," said Dieter Hluchy, a trader at
Stadtwerke Hannover AG, an energy supplier based in Hannover,
Germany. "It's now a European market."
Market coupling, a system of coordination first introduced
between France, the Netherlands and Belgium four years ago,
allows power exchanges and grid operators to make the most
efficient use of high-voltage cables. Norway, Sweden and other
Scandinavian markets are linked separately.

'No Constraints'

The difference in prices for next-day electricity in
France, Germany, Belgium and the Netherlands converged at 51.21
euros a megawatt-hour after the markets were joined under the
Central Western Europe coupling project on Nov. 9. Day-ahead
markets are gauged by traders to determine prices for longer-
term contracts, which factories and utilities use to lock in
power needs for months and years ahead.
"There were no constraints" on the international cables
"and that's what the system should do," said Bert den Ouden,
chief executive officer of Amsterdam-based APX BV, one of the
exchanges coordinating the project.
Trading German and French power markets separately can
still be justified because of the nations' differing generation
systems, according to Peter Krembel, Essen, Germany-based head
of continental European power, carbon and cross-commodity
trading in the supply and trading unit at RWE AG, the country's
second-biggest utility.

French Nukes, German Coal

Germany gets about 23 of its electricity from nuclear
generators and 42 percent from hard coal and lignite, according
to Bundesverband der Energie-und Wasserwirtschaft, a Berlin-
based utility association. France sources more than 75 percent
of its power from nuclear reactors.
The premium for French day-ahead power over Germany's has
averaged 11 euro cents a megawatt-hour in the 14 days since they
converged on Nov. 9, compared with 3.34 euros in the two weeks
before coupling, according to prices from the Epex Spot SE
exchange in Paris.
"Coupling is a really good vehicle to bring the markets
together and make more efficient use of the existing grid
infrastructure," Tony Cocker, chief executive officer of E.ON
Energy Trading, a unit of E.ON AG, Germany's largest utility,
said in an interview at the EMART conference in Amsterdam
The difference widened to as much as 9 euros in October
2008, when Paris-based Electricite de France SA, the world's
biggest operator of nuclear plants, kept as many as 16 of its 58
French reactors offline for maintenance, while German prices
fell amid the financial crisis. It averaged 2.55 euros in 2009.

Convergence Across Europe

"The ongoing convergence in forward prices all across
Europe will continue and ultimately translate into lower
premiums" on longer-dated contracts, said Krembel at RWE.
"This is especially true within a low-volatility environment."
The next-year German contract has traded between 45.05
euros and 55.50 euros this year, compared with 41.60 to 59.50
euros in 2009, according to broker prices compiled by Bloomberg.
"Within a few years the existing market coupling can be
increased substantially," Johannes Kindler, vice president of
the European Regulators' Group for Electricity and Gas said in
an interview at the Amsterdam conference yesterday. "We're
thinking about extending it to the east and to the south."
Epex Spot Chief Executive Officer Jean-Francois Conil-
Lacoste also expects market coupling to spread across Europe.
The exchange is a venture between Germany's European Energy
Exchange AG and France's Powernext SA.
"The next frontiers should involve the neighboring
countries of the U.K., Switzerland and the southern part of
Europe where significant gains can be made such as Spain,
Portugal and Italy," Conil-Lacoste said yesterday in Amsterdam.
Bloomberg tracks power prices from brokers including GFI
Group Inc., ICAP Plc and Spectron Group Ltd.

For Related News and Information:
For more Energy Markets columns NI NRGM <GO>
European power-market stories TNI EUROPE PWRMARKET <GO>
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Energy markets home page NRG <GO>
European Spark and Dark Spread Calculator ESSC <GO>

--With assistance from Ewa Krukowska in Brussels. Editors:
Stephen Voss, Rob Verdonck

To contact the reporter on this story:
Lars Paulsson in London at +44-207-673-2759 or

To contact the editor responsible for this story:
Stephen Voss at +44-20-7073-3520 or