Upside for German power prices

German power prices have gained in recent weeks amid colder weather and a strong carbon market, with the bullish trend set to continue over the coming weeks, at least according to this week’s guest. 

Listen to a discussion on Germany’s coal exit tenders which have led, to the surprise of many, to the closure of modern, efficient plants but left older units in operation. In addition, we look at the outlook for carbon prices as well as the prospects for PPAs in Europe’s largest power market. 

Host: 

•  Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Tobias Federico, Managing Director, Energy Brainpool. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly podcast. Bring Energy Matters in an informal setting as is now tradition listeners, in the first part of the year, we speak to Tobias Federico, owner and managing director of Berlin based analysis firm and consultancy Energy BrainPool. Tobias has decades of experience covering energy wholesale markets. What he doesn't know is not worth knowing. Anyway, so a warm welcome to you, Tobias.

Tobias Federico, Managing Director, Energy Brainpool: 0:55

Thank you Richard. It's a really nice welcome from you. Thanks a lot.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:59

How's life in Berlin? Are there any silver linings? In the COVID gloom?

Tobias Federico, Managing Director, Energy Brainpool: 1:03

Yes it is. There's a lot of hope regarding the vaccination. Actually, I think it was a very quiet Christmas and a very quiet New Year's Eve, but I think it's a good start for the year that we are starting with quietness and hope and speeding up the whole year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:19

Excellent. Fingers crossed. Anyway, I think I plan to discuss with you some of the key developments in Germany, specifically policy areas, the coal exit and the renewable law. Let's stick briefly to COVID and what have you seen the impact on the market so far? Has there been any downturn in demand that you've seen? Tobias,

Tobias Federico, Managing Director, Energy Brainpool: 1:38

Actually it was in the first shutdown, there was a huge downturn in demand, especially because the industry did shutdown. Now in the second one, there's just a little decrease in the demand, but the winter is a bit colder than it was last year. So therefore we don't have such a high effect on demand now with the second lockdown, even though it started quite lightly and then speeded up a bit in December. So no huge effect on demand as it was in the beginning of the year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:05

So things are coming back to normal and obviously the. The colder weather is kicking in, but we'll return to that in a minute, I'm sure. But how about, there was talk in the first sort of weeks and months of the Coronavirus pandemic about the possibilities for insolvencies or companies going under. Have you, have we seen any of this in Germany at all?

Tobias Federico, Managing Director, Energy Brainpool: 2:24

Actually not yet. I think the political measures to financially support companies which are having problems. And secondly, we have this we call it court abide short work. Where the government is taking over some of the payment of the employees helps a lot for companies not to fail bankruptcy and to get solvency this year, but it might come next year. From the energy providers, we don't see big issues there. Of course, there has been less demand and they have procured quite a lot and had to sell the oversupply to the market. But financial wise, there is no big deal right now, but it might come later.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:07

So potentially 2022. And, prices were obviously very low at the start of the pandemic, but now we're seeing very robust, strong prices to be, as I see the spots been trading above 70 euros in early December and January. Although it dips down of course over the Christmas period and the frontier. Is up 25% to over 50 euros. So what, what's driving prices at the moment?

Tobias Federico, Managing Director, Energy Brainpool: 3:30

Of course, first it's the weather looking into the temperatures outside. It's cold. It's not freezing cold. But in the last Christmas periods, we always had quite warm and quite wet weather. Still it's wet, but it's round about zero degrees centigrade, so it's quite cold. And it was quite cold in December. That's why spot prices are driving up. And of course if it's cloudy and we have less wind, we have the conventional power plants running. That's why we have quite high spot price. But it's really interesting to see on the long-term market, the year ahead contract, how it did increase. And it's almost over 50 euro, which is quite a lot. And this is mostly due to the EUA prices and EUA prices have really increased. They did start a climb in the mid of the year after the down dip with the first shock of the Corona crisis. And now they have really speeded up and it's really interesting to see that we have now reached price levels over 50 euros.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:27

And the front year, do you expect carbon prices to keep climbing up towards 40 this year, or will they trade in this sort of 30 to 35 range, do you think?

Tobias Federico, Managing Director, Energy Brainpool: 4:37

It's always difficult to tell with EA, a prices. Absolutely. If we do believe in our forecast on the long term, they will increase. We usually have underestimated the speed of increase. But I do think the UA prices are the main drivers for protecting the climate and it's a game changer right now. We do see that gas power plants in the money, coal power plants are at the money or a little bit out of the money. And therefore it could easily be that we will climb up to 40 euro per uua on a long-term perspective in our long-term forecast up to 2040. We are seeing 120 Euro K certificate, which is quite necessary also to have

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:16

No, that's sub substantial. Yeah. Substantial increase as well. But as you say it provides that price signal for the clean energy transition, doesn't it? If we return to Germany, to be honest, we saw at the end of last year the German government, with its. More concrete plans, the auctions for the coal exit and the list of mandatory closures. In your view, what are the key takeaways here of the policy developments there in the coal exit towards the end of last year?

Tobias Federico, Managing Director, Energy Brainpool: 5:41

Interesting Was that with the first list of coal power plants, that even new coal power plants with quite high efficiency wanted to exit earlier than expected. That's something we had did not expect. We were thinking about that old coal power plants would be. Out of the market due to the high emissions. But in fact it was, I think, much more an economic thought about the total costs and the potential returns so that we have even new coal power plants exiting the market. The question is, in the end, does a high UA price with a low gas price? Not solve the problem from the market side. And actually it does, but the market is quite volatile, so it could easily change within a year or two. So therefore, the hard coal exit is something which gives certain guarantee to reduce CO2 emissions.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:31

When you say the modern plant, we're talking here more Borg the Vattenfall unit and R W's Sile knee, are those the most modern plants you're referring to?

Tobias Federico, Managing Director, Energy Brainpool: 6:39

Absolutely. Absolutely. That's something we did not expect. Of course, if you look into the news and the problems they had with these power plants before, it was quite likely, but it wasn't really something where I would say that's one of the first power plants exiting the market. But in the end it was, and it's a, of course, rational behavior from the producer. And of course also in the auction the bidding prices are quite high waiting a bit longer. Means the lower prices and so therefore it's, there is an rational behavior behind that and, but something we didn't really expect in the first time.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:12

Absolutely. So that's a bit of a surprise there. But then, so you see some of the plants that were, that came online in the late eighties, early nineties, maybe they will. They'll be allowed to run into the to the 2000 thirties, in

Tobias Federico, Managing Director, Energy Brainpool: 7:23

Yeah, that's interesting to see because in the end you have the short run marginal costs, which are important, and you also have the capital costs, which are quite important. And when you take the total cost, of course, the capital costs is the biggest pressure you are having. So usually we, from the analysis side, from the modeling side, are looking into short run marginal costs, and that's our only driver. And in this case it would be rational to shut down old power plants and leave the newer ones. But if you take the total costs into account, then of course you have much higher cost with newer power plants than with older power plants, which is a pity Looking into the CO2 emissions itself.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:01

Absolutely. And then you see the ultra modern one that the last plant that went online, I think at some point last year, I can't off the top of my head remember exactly when, but daton that unit and that's gonna be allowed to run until late 2030s.

Tobias Federico, Managing Director, Energy Brainpool: 8:13

Yep. Yeah. Daton has a special issues and there were a lot of problems there. And, it could run, which makes sense in the end because looking into the efficiency of the power plant, it's not too bad.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:24

But then do you think, in a sense that, do you think there'll be some market driven closures? If you're saying, the carbon, you know it's on an upward trajectory towards 120 to Euros a ton. Do you expect the market to, to drive some sort of shutdowns? That could push hard, hard coal fired capacity below the eight gigawatts that's allowed to stay in the market. After. 2029. What's your view here, Tobias?

Tobias Federico, Managing Director, Energy Brainpool: 8:48

It's interesting of course assuming rational behavior, when you don't see a short term perspective or a midterm perspective of a power plant, which is out of the money, then you should close down the power plant. Interestingly, we haven't seen that in the past. Looking into gas power plants in the last year have been in the money for the first time since eight years, and for eight years, these gas power plants really didn't. Exit the market at all. So there was no shutdown of a gas power plant because hope dies in the end. And there was always the hope that the market might be better. There might be a certain day where I would earn a little bit more money looking into coal power plants. I could assume the same. Even though the market signals are not so good for coal power plants, there might be certain periods whether driven, price driven, where it makes sense to run these coal power plants with a much higher margin than expected, even though it means that you're running much shorter time. But of course the design of the coal power plants was between 3,506,000 hours a year. And they're not, might not seeing that when they're out of the money and just hoping for bad weather for the renewables and good weather for them.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:04

It's an interesting idea. You could see they'll be idled until we get into these periods of extremely cold weather when there's no wind blowing. The famous German vinta, Don Lauter, isn't that what the you call it?

Tobias Federico, Managing Director, Energy Brainpool: 10:16

Yeah. So that's. That's a bet on the weather. And I do expect much more of this type of behavior, which is a bit against the nature of the classical power plant producers or power plant investors because they have been expecting a continuous cash flow. And this typical behavior is normal for peak power plants where the justice expect is two to three times a year where you are really getting to earn a lot of money. So the investment behavior for new type of power plants, just covering these donka Flo periods is a complete different one than the traditional investors. And looking into the owners of the coal power plants, either they will change their general behavior looking into good times to earn money, or they just want to idle until they have a much longer period of, potential positive cash flow.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:10

So for those listeners who are unaware of who are not up to speed on that German jargon, if you like the don float is when it's periods in the winter, a darkness and no wind, if that's correct. Tobi.

Tobias Federico, Managing Director, Energy Brainpool: 11:20

It's absolutely correct. Unfortunately, we don't have very good translation into English for that. We are German centric in a lot of words looking into renewables. And LAU is one of this part.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:31

It does, it covers it very nicely. It's a nice, it's a nice piece of jog and I think in a sense but to be honest, we had another auction this week or another tender. We won't see the results coming out until eight weeks. But what kind of Unix did you expect to, to have participated there?

Tobias Federico, Managing Director, Energy Brainpool: 11:46

Honestly, it's really a bit of a bet because again, in the first tender, we have expected other coal power plants to be part of that. And in this tender it's interesting to see which will come out, I think. It's really hard to say because again, rational behavior is not there. And so for us it's a bit more complicated to tell what's, what will be the results.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:08

We'll have to, we'll maybe have another chat in two, two months time when the results come out, Avi, and then we can analyze it a bit more closely.

Tobias Federico, Managing Director, Energy Brainpool: 12:16

Absolutely. In this case, it's really necessary because sometimes when you have these unique tenders, and for me, it's still in unique tenders for us as an analysis company, it's really difficult to tell also with the other tenders looking into. Renewable energies for wind. It's always hard to predict an outcome and that's why there are certain tenders where we just have to wait and see the results and then analyze it.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:38

Absolutely. Does that mean that these closures aren't priced in yet? How is the market pricing in the these shutdowns of these units?

Tobias Federico, Managing Director, Energy Brainpool: 12:45

Actually what we do have is that we have this fixed timeframe where we have certain megawatt of installed capacities in certain timestamps in the future. And in between that usually the market and also we as a modeler, expecting a linear decrease. Of course, it might be a bit volatile from year to year. So generally it's priced into the market. And luckily last year we had downturn in the electricity demand. This year we have to see how, what's going on looking into the electricity demand. So I think both is important for the pricing. One is the reduce of electricity demand, and the other one is the reduction of the guaranteed capacity by missing coal power plants. On the long term view, it has been integrated. But when we look into our model results, at least it was in the last year. That for the years 2023 and 2024, we did expect much higher prices than the market was trading. But what is important to know is that usually it's just the settlement price by market makers and not real trader price in such a long end of the trading curve. Exactly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:55

So those prices are fairly illiquid, isn't, aren't they? It would be safe to say, yeah. Yeah. But then do you think there's more. Potential here for the upside?

Tobias Federico, Managing Director, Energy Brainpool: 14:04

Yes, I would guess so. First is UA prices, which are always good for surprise on the upside movement. And secondly, of course, when the market realized, ooh, there are certain capacity missing in combination with the weather risk because we had quite mild winters in the past and the last 10 years, I think we had eight years, which are really warm. So therefore, I do expect that the weather will give us a certain surprise. So the upward trend is very likely

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:32

at our conferences. Tobi, as you, you made it very clear or one of when we could actually meet in person and have a, an event such as the Montes German day, you highlighted the danger of a capacity squeeze from sort of 2022. Is that still an issue?

Tobias Federico, Managing Director, Energy Brainpool: 14:48

It's, again, it's a bit difficult to say because we do now have compared to I think it was in Vienna when he had it, and at this meeting it was. Pre COVID. So there will be we do expect a return to normal electricity demand after two to three years after 2020. But the question is what has been the expectations when we set it in that time? And actually it was really that we did expect a quite high increase due to e mobility and power to gas, power to x. In that period. So I think the risk is still there, but it's not as high as pre COVID.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:28

So maybe there's a year or two time lag before that becomes such an issue.

Tobias Federico, Managing Director, Energy Brainpool: 15:32

Yes, I think so. And this one or two years could be very helpful in the case that new capacities might come to the market, either offshore wind energy or gas power plants, because it's, we do expect a five year periods for new conventional power plants to come to the market. In this case it only could be gas power plants.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:53

I can't see anyone building new coal fired plants anywhere in, in

Tobias Federico, Managing Director, Energy Brainpool: 15:57

almost worldwide. That's, yeah, exactly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:59

Exactly. Just doesn't make any sense at the moment. But then to be, I think that's very interesting. I think that's that's a very good summary of the key elements of what was happening with the coal exit law. But if we turn to the renewable side, there are also a lot of developments here in the re renewable or the new renewable law in, in Germany, or revised. Renewable law. What were your takeaways there?

Tobias Federico, Managing Director, Energy Brainpool: 16:19

The hope is that with this new law, we will have an incentive to have new investments into renewable energies. It's pointing into a quite good direction, honestly. And of course, they are looking, we have to look into details, especially also of the old EEG power plants, which are facing out now because this is the first year, and it's interesting to see 2021 where we do have the first EEG power plants, which have been installed in. 2000 or pre 2000, jumping out of the financial support, what's happening with them. And we, of course, have the PPA issues there. And so I think the new energy, renewable energy law gives a certain support looking into the right direction because the target is quite high to reach our goals in 2030. Now looking backward, we almost have reached our 2020 goal, but this was not due to political decisions or investment behavior. This was just due to COVID. That's the nice story when you plan a certain percentage of renewables in a certain year. You don't say what is the baseline? And still we are looking quite critical into the baseline electricity demand because that's the measurement of the 65% renewables. If the electricity demand is increasing due to power to x, power to gas or e mobility, then of course it's hard to reach the 65% target. Of course, if you do have the next crisis in 10 years, which is quite likely that we'll have a certain type of crisis, then it's easy to reach this goal. But it's not a political decision and it's rather a random

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:59

a Absolutely. If we could just go back a step to and talk about the renewable units, so the wind units that were part of the original subsidy system, the free of tariff system. Has that system been extended by six months or are these facilities now able to produce guarantees of origin and becoming more interesting to PPA developers?

Tobias Federico, Managing Director, Energy Brainpool: 18:19

The interesting thing is that when you look into wind power plants and the extension of their production period, from the technical side, they might be able to run another five to 10 years. That's why we have seen there a run to PPAs in general. What is also interesting to see that with the financial support of the EEG law, you have not been allowed to produce guarantees of origins. And now that the financial support is gone, they are allowed to produce these goos and therefore the PPA always comes with a combination, but the energy part was much more on the focus than the green energy part. Which is the guarantee of origin. We have seen a certain run to the five year contracts, but on, especially on windmills, there are some other issues which are the permissions for the ground, permissions for the stability, and they might run out after a certain period. And then usually the power plant, even though the engine itself might be still able to run, has some other issues where it doesn't really make sense financial wise to let the power plant run any longer. The price level, and this is one addition I would like to add is that the current price level of 50 euro might be quite interesting for PPA contracts.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:33

Absolutely.

Tobias Federico, Managing Director, Energy Brainpool: 19:33

Which is much better than the 35 euro.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:35

For sure. For sure. But I just think, 'cause what I'm hearing is that some of these, although they're due to end the subsidies, that some have been extended by a period of time. Is that correct? So that they won't actually come into the. As you call it, the sort of merchant market and for a number of months,

Tobias Federico, Managing Director, Energy Brainpool: 19:49

Actually it might well be, I'm not really aware of that right now. But it helps a bit to organize the transition from the financial side just to avoid it. It will be shut down, but a much longer extension really doesn't make a lot of sense.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:03

Absolutely. I think there's a, obviously a growing awareness and a growing interest in a lot of these units that are coming into the merchant market. Obviously from the PPEA development side. But Tobi, when if, just touching on the demand side again, when you talk about power to X, what do you mean there?

Tobias Federico, Managing Director, Energy Brainpool: 20:17

Power to X is the X you can be replaced by a lot of other things. We do use electricity now as a energy source, which has not been used beforehand. For example, to produce heat out of electricity, which is something in Germany, which is not quite common because usually you use heating oil or gas to produce heat. Power to gas, for example, where you produce hydrogen is something which is interesting, but from hydrogen you can also produce methane. So artificial methane, and that's power to gas. Power to mobility could be something else, which is electromobility. In general, it's a power to X is a, it's not a typical German phrase, but I think it shows quite well that electricity will become much more important as a type of energy source. As it was before for non-typical electricity usage.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:09

Exactly. So the electrification of transport and heating, in other words, that's the big growth potential there.

Tobias Federico, Managing Director, Energy Brainpool: 21:15

And also the production of artificial fuels, which is hydrogen in the first step. Meth Nissan in the second step, and who knows what else, what will come in this situation where we have a huge surplus of electricity, out of renewable power plants, we could use. This electricity to produce other sources of energy.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:35

Absolutely. Absolutely. And what about e mobility? What's happening in Germany here? What's the take up rates of electric cars? Is it is it proceeding slowly or disappointingly or

Tobias Federico, Managing Director, Energy Brainpool: 21:44

It has picked up quite well. Of course it has not picked up as well as expected. And there is always this phrase, and this was quite interesting to see also 20 years ago, that you are always expecting 1 million cars of a new technology within 10 years. So we have expecting 1 million cars of electrical cars within 10 year timeframe. And we did expect that with hydrogen cars using a few cells in the early 2000 years. There was this hype of a few cell cars. So there have been expecting about 1 million if you saw cars on the streets in 2010, and in the end it was only a few thousand. The e mobility sector did pick up much better right now, but still the question is electricity really a good source for mobility or should we use hydrogen? And again, we are then either in burning hydrogen in an engine or using fuel cell cars. So I think the hydrogen hype will pick up different alternatives of mobility. And e mobility is one part, but the second part will be also definitely hydrogen, both. Electricity is the main source of producing the fuel or the mobility.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:58

Very interesting stuff to piers. I think a certain, certain questions need to be answered and the certainty is still not fully there if I read between the lines there. But I think that's about all from the Montel. Weekly podcast this week. So thank you very much Tobias, and I hope we don't have to wait another full year before speaking to you again.'cause there are a number of issues that I'm sure we'd like to talk about. So once again, Tobias, thank you very much.

Tobias Federico, Managing Director, Energy Brainpool: 23:20

You're always welcome, Richard. It's always a pleasure and it's great that we have a tradition after. Two years to have the opening podcast for Montel.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:28

Absolutely. Perfect. Yeah. So listeners, you can now follow the podcast on our own Twitter accounts, aply named the Monte Weekly podcast. Please direct message. Any suggestions, questions, or, let us know if you think you have a good idea for a guest on the show. You can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Monte News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Please remember to leave a review if you can. Thank you and goodbye.