From European Power Year
The 2007 power year has been characterized by benign
complacency. Within-year prices have trended gently down on mild
weather and soft demand.
"Long term prices are set to rise over Euro60/MWh" -
analyst
The summer has been notable for a welcome lack of volatility
- no cooling water panics, no air conditioning crises. The
extinction of Phase I carbon has removed a contentious
inflationary element in price formation.
Meanwhile
year ahead base power
has stabilized across Europe around a mid-point of Euro55/MWh.
The signs are clear, however, that next year and beyond the
storm will break again.
Carbon is set to bounce back
to Euro20-plus/metric ton, global coal is as expensive as it has
ever been and the big utilities are gearing up for massive
new-build programs.
"Long term prices are set to rise over Euro60/MWh," an
analyst told Platts September 19.
"Did you see the Euro2,100/kW mentioned by Stadtwerke
Bielefeld as the reason for canceling their coal project? If you
put this into a new entry cost model together with a coal cost
of $85/ton, then you get power prices of Euro75/MWh."
Bielefeld's capital cost complaint could be a one-off. Small
developers are being squeezed by plant suppliers focused on
bigger clients.
There is no doubt, however, that the cost of new build coal
plant has risen dramatically this year, from Euro1,100/kW to as
high as Euro1,500/kW for supercritical pulverized fuel (IGCC
with carbon capture, however, is put at well over Euro2,000/kW).
It will be several years before new build capital costs feed
through into the power price. In the short term,
carbon and coal will
stoke forward base power rates.
Our
coal chart shows
Platts 90-day assessment breaching the $92/metric ton mark in
September.
Spot coal prices tend to peak in Q4, but European buyers say
the market is strong and prices are not likely to dip below
$90/t CIF ARA, not least because the freight market is expected
to gain fresh momentum in Q4 and Q1 2008.
Forecasts for the average price of CO2 through Phase II
meanwhile fall in a wide range of Euro19.5-35/ton, against a
forward price for December 2008 CO2 of around Euro20/t.
The market tends to agree that, while Kyoto credits from
JI/CDM projects will cover much of the shortfall in national
allocations, project development will not be fast enough to
cover the whole deficit.
A recent assessment comes from investment bank UBS. On
September 12 the bank estimated that the EU emissions trading
scheme would be 189 million mt/year CO2 short during Phase II, a
shortfall of 9% on stated needs.
"We forecast Euro25/mt for 2008 versus a forward curve of
Euro20.8/mt; Euro20/mt for 2009-10, increasing to Euro30/mt for
2012. 2008 and 2012 prices reflect the cost of fuel switching,
which has decreased by Euro5/mt following a soft gas and a
strong coal price."
Created: October 16, 2006
