«Money for Nothing
The invasion of Renewables»
Structural changes in the Italian Power
Market
FABRIZIO RINALDI
Director Market Strategy & Derivatives
Edison Trading
21 January 2014
Market Strategy & Derivatives
Italian power prices remain high compared to Central Europe…
2
Market Strategy & Derivatives
… due to different fundamentals, which cannot be compensated for by market coupling
Hydro
8%
20%
27%
9%
UK
Coal
Germany
29%
41%
Nuclear
18%
Lignite
22%
Natural Gas
Fuel oil
Wind
35%
46%
Solar
Hungary
12%
Switzerland
14%
36%
11%
23%
Romania
59%
France
Others
31%
75%
20%
11%
18%
15% 12%
15%
23%
Spain
23%
7%
Italy
26%
46%
Greece
Market Strategy & Derivatives
60%
The boom of Photovoltaic is unprecedented
Renewables installed capacity 30
25
GW
20
15
10
5
0
PVS
Wind
Geothermo
Bioenergy
After a significant increase of gas powered capacity, driven by favourable
margins, the PV capacity has taken off, but as a result of magnanimous subsidies.
Renewables are now a substantial component of installed capacity.
Market Strategy & Derivatives
… but power Demand collapsed
TWh
Power demand in Italy
10%
350
340
330
320
310
300
290
280
270
5%
0%
‐5%
‐10%
Demand
YoY growth (rhs)
Combination of low demand and increased capacity lead to an excessive reserve margin,
whose cost is born by producers.Additionally, The peak/off peak ratio collapsed, together
with seasonality, eroding CCGT’s intrinsic value.
Market Strategy & Derivatives
Prices : down, down down
120,00
PUN vs ITEC
100,00
€/MWh
80,00
60,00
40,00
20,00
0,00
PUN
ITEC
6
Market Strategy & Derivatives
Supply-demand balance: summer 2013
Price dependent offers can be a
residual component on the supply
stack.
Need of higher modulation
7
Market Strategy & Derivatives
The supply curve in mid july 2008 …
Merit Ordine di merito 17/7/2008 ore 13
Order Thursday 17/7/2008 hour 13
350
UPV
300
TG
serbatoio/bacino
250
pompaggio
€/MWh
olio e policombustibile
200
geotermico
fluente
eolico
150
117 €/MWh
CCGT
carbone
100
altro
Bid
50
0
GW
8
Market Strategy & Derivatives
… and on the same day 5 years later
MeritOrdine di merito 18/7/2013 ore 13
Order Thursday 18/7/2013 hour 13
350
300
€/MWh
250
200
150
100
solare
UPV
TG
serbatoio/bacino
pompaggio
olio e policombustibile
geotermico
fluente
eolico
CCGT
carbone
altro
Bid
57,4 €/MWh
50
0
GW
9
Market Strategy & Derivatives
And demand is not silent
Demand/supply curve
Curve di domanda e offerta
Thursday 17/7/2008 hour 13
Mercoledì 17/7/2008 ore 13
350
300
€/MWh
250
200
150
Supply
Offerta
Demand
Domanda
100
50
0
10
Market Strategy & Derivatives
Demand is flatter and more price sensitive
Demand/supply
curve
Curve di domanda e offerta
Demand/offer
curve Thursday
Thursday
17/7/2013
hour 13
18/7/2013
hour 13
Mercoledì 18/7/2013 ore 13
350
300
€/MWh
250
200
Supply
Offerta
150
Demand
Domanda
100
50
0
11
Market Strategy & Derivatives
CCGTs’ load factor collapsed
Gas fired power stations are getting virtually uneconomical
12
Market Strategy & Derivatives
Evolution of spark spread in Italy : CO2 is irrelevant
PUN Peakload Vs. Spark Spread
PUN Baseload Vs. Dark Spread
140
140
80
120
60
120
40
100
40
100
20
80
20
80
60
0
60
40
‐20
40
100
80
‐20
‐40
Yearly spark
PUN PK‐ITEC
Yearly dark
PUN PK
Clean spreads
80
60
60
40
40
20
20
€/MWh
80
€/MWh
100
0
‐20
0
‐20
‐40
‐40
‐60
‐60
‐80
‐80
clean spark on PK
PUN BL (rhs)
Clean spreads
100
Spark‐Dark
Market Strategy & Derivatives
PUN BL‐ API2
€/MWh
€/MWh
0
€/MWh
€/MWh
60
clean dark on BL
Spark‐Dark
Spark@PSV‐Dark
clean dark on BL
clean Spark @PSV
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Gas price and zone are decisive for spark spread
Spark spread 2012 Picco
Spark spread 2012 Baseload
50
50
40
40
30
30
20
20
10
10
0
0
‐10
‐10
‐20
‐20
BASE
Nord
Sud
Spark @PSV
Sicilia
Sardegna
Spark @ITEC
Centro
PICCO
Nord
Sud
Spark @PSV
Sicilia
Sardegna
Centro
Spark @ITEC
Price paid for gas can affect dramatically the spark spread, and long term contracts
have been unsustainable for power producers, leading to contracts renegotiations.
But even the zone is an important factor.
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Market Strategy & Derivatives
The new wave of regulation
 Regulation is playing an increasing role in commodity markets
 Capital and liquidity requirements will likely drive liquidity down
 Reporting obligations will be a heavy burden, especially for smaller players
 Higher transaction costs (bid/ask widening and cost of additional capital)
 Higher basis risks
Portfolio optimization will become harder, leaving higher risk
sitting in utilities
15
Market Strategy & Derivatives
Easy money for R.E.S.
 The renewables’ revolution is already here : in 2012 already 175 GW of wind and
PV installed capacity in Europe
 The objective of arriving to 80% emission free generation by 2050 would require
additional huge investments in renewables, which could become unsustainable
 Cost is already high. For Italy it reached a total of € 27 bn during the period 20102013
 Incentives in most cases are not based on market based mechanisms, and with
no market risk
 Cost of energy is contributing to make Europe less competitive, especially
compared to USA
 Keeping low prices for energy, favouring green power generation whilst
maintaining security of supply is an impracticable combination of inconsistent
objectives
Market Strategy & Derivatives
16