Italian Q3 ’20 clean spark spread to drop further amid coronavirus

LONDON (ICIS)–The Italian Q3 ’20 clean spark spread is likely to continue tightening as power prices sink further on increasingly sluggish demand and bearish carbon permits amid the coronavirus outbreak.

The clean spark spread is an indicator of gas-fired power plants’ profitability, including fuel costs and carbon permits.

Reducing clean spark spread typically points to a downward revision of the expected production from gas-fired plants.

ICIS assessments showed that the Italian Q3 ’20 clean spark spread stood at €14.88/MWh on 11 February, roughly ten days prior to the major outbreak of coronavirus in the country.

Up until 24 February, the spread hovered around €14/MWh, before rapidly crumbling to a low of €11.92/MWh on 17 March, ICIS data showed.

This means, the spread has lost 19% of its value since 24 February, a day after the adoption of the first decree establishing preventive measures across the peninsula.

This was predominantly due to a drop of the Italian Q3 ’20 power Baseload contract, which shed 16% of its value since 24 February,

This would suggest tightening clean spark spread was the result of the power contract losing ground at a faster rate than PSV gas prices.

PSV’S SLOWER SLIDE

Indeed, the Italian natural gas Q3 ’20 product lost 9.6% of its value since the beginning of the month to date, ICIS assessments showed, following the general bearish trend in the wider energy complex due to the spreading of the coronavirus across Europe.

The PSV gas contract lost less value than the power counterpart because gas demand during the summer period is expected to remain supported from storage injection-related demand.

This is due to the Italian regulated regime which obliges shippers to withdraw set monthly quotas through the winter and inject quotas in summer.

Nevertheless, the PSV Q3 ’20 premium over its Dutch TTF equivalent over the last three sessions remained below the level considered profitable to import gas from tnorthwest Europe through the Transitgas pipeline, considering transportation costs. This suggests traders are less likely to import gas on the route for the period to meet their injection demand.

This may be due to the ongoing oversupply created by the LNG influx into the country and constrained demand after the coronavirus outbreak.

CARBON WEAKNESS

Meanwhile, a robust downtrend tightened its grip on an already weakened EUA December ‘20, causing a 25% value disruption since 10 March up to 17 March, as seen by ICE data.

The sudden dip was the result of travel bans announced by several EU member states to stem the spread of the pandemic, curbing airlines’ demand to buy emissions allowances.

Ongoing weakness in the wider fuel complex, and especially in the carbon market, seems thus to have sent a decisive bearish signal on the Italian Q3 ’20 power contract and clean spark spread.

According to a trader active in the Italian market, the tightening of the Q3 ’20 clean spark spread is to be primarily attributed to falling carbon permits, as these are set to drag the power product further down.

Should the Q3 ’20 power contract slide even more, the clean spark spread will face the risk of turning negative, even if gas prices are currently low enough to avert such eventuality.

Additional reporting by Marta Del Buono