German, French lockdown not priced into Q2 power contracts

LONDON (ICIS)–European electricity markets have not priced in the potential lockdown of France and Germany into near curve power products, traders polled by ICIS said on Monday.

This may spell downside for German and French power prices in the event of a state-enforced lockdown due to the coronavirus, similar to that enforced by Italy on 9 March.

DEMAND SLUMP

ICIS analysis demonstrated that Italy has seen a slump in gas demand since the lockdown. Gas is Italy’s main source for power generation and the marginal fuel, therefore a price setter for its power market. The Italian April and Q2 ’20 Baseload power products each shed one-tenth of their value between 6 March, the session prior to the lockdown, and 16 March, ICIS price assessment data showed.

Some of these losses may have been due to fundamental changes such as temperature and renewables forecasts. That said, a heavy sell-off on 16 March, when April and Q2 baseload contracts lost around 7%, was linked by traders to significantly low demand due to the coronavirus lockdown.

One Italian trader said that she had never seen demand numbers this low.

In the event of a lockdown of Germany and France as looks increasingly likely, a similar price slump may occur.

“I see the demand forecasts and I can hardly believe the estimates are correct,” one trader active on German and French power markets said.

Participants said that it was very hard to quantify exactly how much prices could fall.

“I think it’s beyond doubt that we will see reduced demand in France and Germany. By what margin however, is hard to tell if everyone simply stays at home and plays video games or streams video,” the trader added.

A second trader said that a lockdown was now quite a likely scenario and would be “super bearish” for the French and German markets.

“It is really difficult to give an opinion in these crazy times,” he said. The demand uncertainty is expected to lower the appetite among traders for taking risks which may also hinder liquidity, recent analysis indicated.

France has the third highest number of recorded cases in Europe, after Italy and Spain. Germany has one of the highest after that and has the continent’s largest economy and population size. Germany generates the most power and exports to neighbouring countries.

The impact of a potential lockdown and the resulting bearishness in the two countries would spill significant weakness across all continental power markets.