A German supply crunch?

Recorded live at the Montel German Energy Day, this week’s pod addresses key issues in Europe’s largest energy market. 

Catch the mood with some key snippets from speakers at the event, and then listen in to a deeper discussion about Germany’s planned coal phase-out. Will the lights go out in 2022? 

Hosts: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel, 
• Nora Kamprath Buli, Team leader Germany, Montel, 
• Anna Siwecka, freelance journalist/podcaster. 

Guests/speakers including by not limited to: 

• Tobias Federico, Managing Director, Energy Brainpool, 
• Trevor Sikorski, Head of Natural Gas, Coal and Carbon Research, Energy Aspects, 
• Konstantin Lenz, Business Developer, Wattsight and Professor for Energy Economics at University of Applied Sciences Erfurt, 
• Uta Staude, Managing Director, European/Asian power, Genscape. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:14

Welcome to the German Energy Day In Düsseldorf Hi, good morning. Good morning. Hi, uh, Alison, before we sit down for the usual Montel weekly interview, a few soundbites to give you an idea of what we discussed in the morning.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:39

It's a great pleasure to have you all here. Uh, this is actually the 15th German Energy Day. We've, uh, traveled all around Germany. We've been to Berlin, cologne, Conex Winter, but we're, we're very happy to be in doff in the, in the past years. We've covered lots of interesting. Topics such as unbundling transparency, but now it's time to look forward and great changes are happening, not not just in Germany, but across Europe. And we've got a fantastic set of speakers. Just talk us through what, um, what this all means for Germany and, and the markets. Uh. In Europe and beyond. Of course, I will be ably assisted by the team leader for Germany, which is Nora K, who'd be sitting here on the front desk with me today. We have quite a full agenda. Uh, we're gonna start off by looking at Germany's coal exits, what it means for Germany, um, and then moving on to the carbon markets. Lots of interesting aspects happening there. Then we'll be looking at what all this means for Germany in terms of security supply. Are blackouts likely or not current? Uh, forward prices would indicate that there's not so much of a, of a, of a supply crunch coming. So after the coffee break, we look at. Um, our old friends, the fossil fuels, so l and g and coal markets. Uh, and then after lunch, we all look at more about the exciting things that are happening in Germany on the renewables front, both in flexibility, options on the demand and supply side for, for, for wind, solar batteries, et cetera. And um, also some legal aspects, whether there's lots of changes happening, but are they being forced through the courts or through. Um, through policy. So I think that's, that's an interesting area which we'll look at. We'll cover something which has been quite a hot topic, uh, PPAs. Um, and this is probably gonna become increasingly important in Germany, um, after 2020 when the first set of subsidies or the the feeding tariffs run out, then we'll look at OTC trading. Uh, before we have a, a panel session looking at PPAs and talking to the exchanges about, uh, uh, changes happening there. But that's enough from me. Um, I'd like to pass, pass the, the floor over to a, to a very, a veteran of this market to who knows it, who knows it all inside out, and who will tell us what, what's happening in Berlin and the implication for wholesale, uh, power markets. So, Tobias Federico, uh. Of Energy Brainpool owner and, uh, managing director, please. The floor is yours to, yes.

Tobias Federico, Managing Director, Energy Brainpool: 3:25

Thank you Richards for the, for the introduction. Yeah. Um, it's a pleasure speaking here again. Um, veteran. It sounds really that I'm old. I think I'm getting older. Um, actually it was really, uh, yesterday, the evening we spoke about it. It's 15 years ago when I spoke the first time, uh, for, for Monte on one of these events. And in 15 years of energy trading, a lot of things have happened. Uh, we had a lot of discussions regarding, uh, market transparency regarding, uh, CO2 prices and an oversupply of CO2 prices. We had a lot of discussions regarding, um, then of course, the price crunch we had in 2008, 2009. In 2011, we had the nuclear phase out and prices were dropping up to now. And obviously right now we do have a discussion about another phase out, which is the coal phase out. The coal phase out itself, um, was one of those measures where we thought, at least we, from energy brain pool, that looking into CO2 reductions could be quite effective because we also had. More than 10, 12 years of emission trading. And the CO2 reductions within Germany due to the emission trading, um, was something we really didn't see a lot happening. We had a lot of CO2 reductions after the unification with the switch from old lignite power plants in East Germany to new high efficient ignite power plants. But we didn't see a lot of CO2 reductions, uh, after that with the CO2 trading. And then we had the development with the political discussion regarding a cold face out. And I would like to speak about the coal phase out today and its implication, its potential implications. We, we might see in the German market focusing mostly on gas prices and power prices. There are a lot of other implications focusing on how the gas market structure might change due to that. But there we do have another speaker. We have a lot of implication onto the CO2 market, and therefore we have another speaker. So I do see my introduction, uh, my slides as an introduction to the whole. I, I really don't know. We have something happening. In 2022, that's the nuclear phase. Out at the end of 2022, the last nuclear power plant will produce electricity and great. We have one phase out. Let's start the other one in the same year. Super. I was looking into Fibonacci numbers. I was, I don't know what's the reason for 2022. The problem with 2022 is. That we will deduct the total capacities in that year of 17 gigawatt, 17,000 megawatt of base load electricity production will be shut down at the end of the year, 2022, 10,000 megawatt from nuclear power plants, and 7,000 megawatt from coal power plants. So. There are some implications and I think we will have a discussion on that later on, and we have also calculated a few numbers. I would like to show them to you what its implications. 2022. This year is a problem. Let's start 2025. We have two winter, three winter where we can see are we really able to work without nuclear power plants in wintertime. You shouldn't forget since 2011. Winters in Germany haven't been really cold. There is no fundamental causality between Fukushima event and warm winters in Germany. But we didn't have a cold winter to now. So, and let's see what's going to happen in 2022. I'm quite concerned right now. Now coming to the real answer, the real questions. What is happening then? And in our model run with the coal phased out. We have been looking into how much additional import capacities do we need from, uh, gas, from conventional natural gas? Much

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:35

thank you for an, uh, excellent overview of, and a and a bit of a, a stark warning there in terms of security of supply as soon as 2022, moving from Germany's Coal Exit and what it means for a security of supply. We'll go on to, um. Europe's carbon market where lots of interesting, uh, things have happened over the past six months, a year. Um, and to talk us through that is Trevor Sikorski of energy aspects. Trevor also knows one or one or two things about gas, but today's here to talk us through, uh, through CO2 dynamics. Trevor, uh, the floor is yours. Brilliant.

Trevor Sikorski, Head of Natural Gas, Coal and Carbon Research, Energy Aspects: 8:06

Thank you Richard. Um, it's always a pleasure to be here, uh, speaking at Monte Energy days. Uh, and um, yeah, so today what we're gonna do is I'll take you through. The delight of the European carbon market, the things that we've seen, uh, happen over the last couple months, and then tie it together in the end with what are the, some of the implications, uh, of the German coal closures, which Tobias, uh, started to talk about. Let's start with where prices have gone, and certainly you're probably all familiar with this. Yes. Throughout 2018. We saw a super bull run in e uua is going from about, I think they started the year at seven, ended the year above 21. So a trebling of the EUA price massively, massively strong bull run. 2019 has shown a little bit less of that, so we haven't been as strong. On the upward trend. And in fact, you could probably say with the exception maybe of the last couple of weeks, we didn't actually have any upward trend at all in the UA price from probably the period of September, almost all the way through, uh, Q1. Um, and I think that was driven by the fact that there was a number of risks, important risks in the market that were stopping speculative capital from coming into the market in greater volumes. Or, or in additional volumes to what we saw in the first, let's say three quarters of 2018. Now, I'd say those three risks, uh, were probably, um, at the beginning, uh, there was a lot of talk about how much open interest there was in the options market. An incredible amount, a, a record number we were looking at in the decade 18 contracts again, um, driven a lot again and a good reference, I think, or a good indicator of the amount of speculative interest that was going into the market. Everyone In 2017, all I would say there was an analytical consensus In 17, uh, this market was gonna go up. This market was gonna be supported, uh, of course by the MSR. Um. And, and Capital came in and, and drove that up. And there was a big concern about what was gonna happen at the expiry of all of those option contracts, right? Because a lot of them were in the money. We had such a strong trend that so many volumes, like three to 400 million tons of UA were in open interest. In strike prices, uh, below 20 euros when we got in. And certainly the market traded a lot around that. And you could see, um, you know, you could see it kind of trending down. Then we, as we got to, that expired in the very, in, in early December, after that happened, the market started to move back up. And then we got to the beginning of the year, and I think some of the other risks started to kick in and to, certainly in terms of, uh, the risks that were out there, the German Coal Commission, and, and Tobias has taken you through what those conclusions were already this morning was one of those, but that had very, very little impact on the market actually. There was very little impact and we'll go through probably why there was very little impact. There was a probably a movement down of a euro, but hey, this Mo, this market moves on a Euro or nothing. So that wasn't particularly big, and then it bounced straight back up, but then it came back down on something which was more important and something which was really, really, I think keeping the market from going anywhere over the first quarter. And that was the risk of a no deal Brexit. Now when you kind of look at this, you could say, well, there's a whole bunch of things going on with the no deal Brexit. But it wasn't just the threat. Uh, and it was very clear what was gonna happen to UK installations. In the event of a no deal Brexit, in the event of a no deal Brexit, they would immediately leave the EU ETS. The UK government came out and said that they said this is what's gonna happen. Um, and because this is what's gonna happen, we're not going to auction and we're not gonna allocate in 2019 because we don't know if any of our installations are gonna have 2019 compliance obligations. They will in a managed deal. Um, they won't in a no deal. So that no deal. Brexit? Yes. That was important because you had that uncertainty, but it was more important because this was a fundamental risk of event for the whole eu if the UK was crashing out either in late, uh, first it was gonna be on the 29th of March, and then that got moved, uh, to. For a couple weeks to April, and then that finally got moved a bit later. But if the UK crashed out at that period, that would've been a massive no risk. That would've been a massive risk off event from every EU asset.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:50

Okay. Moving on from, um, carbon and coal or coal exit, uh, discussions, I think, we'll, we are gonna have a small. Round table discussion now, but prior to that, both the, the panelists will have a, a small introductory, uh, presentation of, Uta Staude Genscape first, and, and then we'll move on to Konstantin Lenz before the round table will be hosted by, uh, by Nora Kamprath Buli.

Uta Staude, Managing Director, European/Asian power, Genscape: 13:17

Um, I'm Uta Staude , I'm from Genscape. I think some of people, you know, Genscape already from the past. Genscape was founded in 1999 by some traders who were fed up with the, in transparency of the market. So that was a starting point with monitoring power plants in Europe. But we developed from. From there now to a provider of data sets and also analytical tools. So, but I say this upfront because we are not selling consultancy or we are also not selling you, uh, price forecast in the way. So what we do is we enable you. To build your own price forecast and your own expectation. And I think having the right expectations and a good understanding of the market is, is basically the basis, the foundation of investment decision and also position taking. Uh, I hope that they manage to, to pull up the presentation, which unfortunately is not the latest version, but I think it, it will work. Okay, good. Thank you. So, uh, security of supply, and we heard already from, from Tobias that he is really thinking that there is a shortage in the market and security of supply is in danger. Maybe yes, maybe not. Also, is it an SOS situation from my point of view? Well, it really depends on your expectation on the weather and of course on your modeling. So are the lights going out 2023? That's what we have to find out. I just skip this. Um, Tobias has already told a little bit about the commission for this commission was, I would say. Um, basically they discussed about the, the triangle of the, of the power market, sustainability, affordability, and reliability. And as you already mentioned, it was a set up with many politicians, many stakeholders, and of course they all have a different point of off.

Konstantin Lenz, Business Developer, Wattsight and Professor for Energy: 15:18

So Tobias has already talked about the coal commission and yeah, also about, uh. Challenges with modeling. Um, I would like to present you really some core numbers. Uh, this is also part of our long term price forecast. Um, and with the last issue, we looked a little bit more on security of supply. And first of all, I would like to start with an approach, uh, which yeah, is used by the German TSOs and it's annually published in the so-called s. Which is usually published on 31st of October, but it was not published on 31st of October last year. Um, and the TSOs see a deficit there. It was published, delayed just one day before the, um, coal commission published their final paper, um, which was, let's say a little bit strange. Um. Because it would have been perfect numbers for the coal commission. However, this is a static approach. Um, and you see four columns here. You see this is today's capacities. This is business as usual. This is the what site, our own assumptions, and this is the coal commission numbers. As they have recommended. You see, this is a lot of numbers. I don't want to focus on everything. I define something here, which is the sum of nuclear and conventional. Of course, I wrote controllable. Of course. Also, biomass and hydropower is also partially controllable. However, what you see is compared with today, a significant decrease in nuclear. And conventional capacity. So we go down from 90 gigawatt today down with a coal commission to 67 gigawatt.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:33

I have with me Tobias Federico, who is managing director of NG Brainpool, and Uta Staude managing director at Genscape, and also Nora Kamprath Buli, who's team leader Germany. It's my great pleasure to have you all here. Welcome. Thank you. Yeah, thank you very much. Hello. Um, I'd just like to start off by asking you what are your first impressions of the German Energy Day? We've had quite a big discussion this morning, and what are your expectations for the rest of the day?

Tobias Federico, Managing Director, Energy Brainpool: 17:58

Well, uh, we did start with the security of supply question. For me, it was, uh, a very good surprise that I'm not the only one having the opinion that we might go into a tight situation so that other analysts looked into that topic and also from the questions from the, from the people to the panelists or to, to the speakers was also very interesting to see that this was the main focus and not so much the gas question and gas supply. I do expect for the next. Our, the gas question and uh, of course the PPAs will have a lot of discussions for the German Energy Day this year.

Uta Staude, Managing Director, European/Asian power, Genscape: 18:33

I think it's very interesting to see that really the outcome of the German commerce Y is still such a hot topic, and I think it really drives the market and it's so interesting to see how different the positions are. And I'm not talking about the security of supply, more about is the market bullish or bearish? Um. Are the, the potential price spikes already priced in, yes or no? And it seems like the market has quite different ideas about that. And from my point of view, there is a huge uncertainty in the market, how it will further go, and how the, uh, the politicians actually implementing this. And I think this is really important.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:16

I, I suppose my first question would be here, um, is, you know, Germany has been quite a driver in renewables building green capacity, and it's been an example for not just for Europe, but for the rest of the world. But is there a danger that by 2022 the lights could actually go out to be us?

Tobias Federico, Managing Director, Energy Brainpool: 19:35

Well, there, there is a certain danger. The lights might go out, especially due to decision of the so-called coal commission. Um, and it's not mostly different by the renewables, it's more different by, by that decision to shut down by political decision power plants, which are producing base load, uh, energy production. Um, um. The problem we are having with the renewables, it's not that we are not man able to manage that within the market. I think the problem is that even with a lot of renewables, and even with quite high CO2 emission prices in the last year, we haven't seen a real reduction of CO2 emissions in the energy market. So there needs to be further, additional political measures to reduce the CO2 reductions. I think a coal phase out is the right step, but not under this. Given timeframe, at least what the um, coal commission said.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:31

Coal coal shutdowns and nuclear shutdowns at the same time.

Uta Staude, Managing Director, European/Asian power, Genscape: 20:35

Yeah, indeed. It's a very ambition target that everything comes basically together. But I also would like to go back to your, your starting point that Germany is a kind of leader in that, and I think we are. In Germany under pressure to de to deliver, and politicians should think more in this line with a higher EUA price. I mean, really, uh, working with, with market driven, uh, instruments instead of sitting basically on, on, on a table and like in former plan word shaft and to discuss how the outcome should look like, I think this is a wrong approach. Mm.

Nora Kamprath Buli, Team leader Germany, Montel: 21:10

Um, thank you for that. Uh, earlier, um, during, , the discussion you, Tobias has mentioned that 2022 is a big year. That's when we shut down the last nuclear plants, and that's also when those coal closures that have been proposed by the commission, 12.5 gigawatt by 2023 would kick in. So altogether, I think you said it was 17 gigawatt of capacity that Germany loses. Uh, why is no one aware of this? Uh, and how can it be avoided that we, we run into a massive shortfall? Um, and is there any solution at the present moment to avoid a massive security of supply risk?

Tobias Federico, Managing Director, Energy Brainpool: 21:51

Well, I do think, um, they are aware of those numbers because they have decided that, and I'm, I'm, I'm quite confident that the Coal Commission also looked into one or two scenarios of, of our competitors. Um, but I think the, the final question is, do you really want to rely, and I think this was the decision within the coal commission on foreign imports for the security of supply. So the, the main question is who owns the electricity? Is it really in need? For the neighbors to export electricity in the case, they're needed for their own. Um, so the, the question is, do you calculate it dynamically or do you calculate it statically? We have seen in a presentation the static numbers, but when you calculate and dynamically with a real weather scenario, our by hour with the problems you have with, uh. The, um, availability of power plants. If there's ramp up speed, ramp down speed, that's a dynamic calculation. Then numbers look differently, and the question is, do we really want to rely on a few power plants on our neighbors or would we like to have a buffer? And the next question is on how do we refinance that buffer so that over capacity.

Uta Staude, Managing Director, European/Asian power, Genscape: 23:03

I think it's a lot about how does it interact in whole Europe. And this really leads me back to, to my beginning, which is like we have to put all of this in, in a, in a, in a future perspective and in a future story. And if we really believe in Europe and one Europe, a united strong Europe, and I think then it's about open, open borders and also invest. Into more cross border lines. And then I think it's very fine if we just really rely on our, on our neighbors, because we are one Europe.

Nora Kamprath Buli, Team leader Germany, Montel: 23:36

So we are hoping, uh, that the, the European system and, and, and also the market to a certain degree, um, um, can help out here. But also, uh, both of you pointed out that market prices at present, uh, for the years, uh, from the coal exit, do not reflect the scarcity that analyst models that you have, uh, shown us. Share or provide. Why or when do you think the market might react to that? Or are we all on the wrong foot here? I think there are two aspects, one aspects that probably market participants are not really believing. The politic, the politicians, or they think that the politics changed so much in the course of, of the last couple of years. So I think there is a lack of trust and also what is, what has been good design and uh, good. On. So, um, I think these touch points before readjusting the, the, the decision are act actually not the, really not providing the security, the trust, the market really needs.

Tobias Federico, Managing Director, Energy Brainpool: 24:40

So I do agree that, um, sometimes com recommendation to politicians might not come into action or will be reviewed, and maybe the market is relying on that. But on the other hand, it raises also as a model or the question is our model approach. The right one, I. Or, um, do, are we missing information others or the markets is having? So it's, there's now no perfect model in this case. So that's why we are also reviewing our models. Looking into that. Are we missing something? Is is, is there something I don't see some information? Or is it a calculation is mistake. So that's why when you're on your own, it's always difficult. But seeing that other analysts see those numbers too, then we raise the question mark, what's going to happen? And, uh, is the market wrong or is our motor wrong? So that's, that's the main question.

Uta Staude, Managing Director, European/Asian power, Genscape: 25:28

If you look at the current market prices, which is relatively low, I mean, this is an average yearly average price. So if you believe that we have many hours with negative prices and some really high spikes, of course the average is different. So, I mean, this could also be either case.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 25:44

Is there an element of conservatism here? Because, uh, you know, um, you know, we're talking big power plants, big central users, central, um, uh, central units, um, cross border lines. How about, you know, small scale solar micro grids, batteries, um, even the blockchain. Um, um, so how, how could this help to alleviate the supply crunch? Uh, Tobias, can I ask you.

Tobias Federico, Managing Director, Energy Brainpool: 26:10

Well, um, the thing is, I think the main question is whether those small players in a, um, additional summing up their capacities comes to those big numbers, which one big lignite power plant is missing. So summing up all the available capacity of 1.2 gigawatt by. Small household available solar production, you need a huge number of house households aggregated into a system, and I think there lies the challenge and the big challenge for us is not the missing capacity. The big challenge for us is the timeframe, because missing capacities in 2023 is something different than missing capacities in 2025 or 2030, because until then we have time to aggregate small players to use new technologies and so on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 27:00

So it's a very urgent issue. In fact, I think that's, that's, that, that's came, comes across very clearly here. Unfortunately, that's all we have time for today. Uh, so thank you very much, Tobias, uh, UTA and, and Nora. Um, we are now off to attend the rest of the conference and, um, we'd invite our listeners to, to attend several other conferences. We have one coming up in, in Oslo, we have in Austria, and we have met several Market insights in, in Warsaw, in, in Madrid. So please do look at the program and if you're interested, uh, come and attend. Also follow us on the Monte website, on Twitter, LinkedIn, and listen to the Monte weekly wire, the the website, or on, on Spotify, and on iTunes. That's all for for now. Thank you very much and goodbye.