Rate of Germany’s impending supply squeeze tethered to carbon

Additional reporting by Arun Toora

LONDON (ICIS)–The German power market is facing an upcoming capacity shortfall as early as next year, a closer look at the evolving energy balance reveals. This comes as the country continues to make progress with its coal and nuclear phase-out.

And the supply situation becomes even more challenging in light of recent carbon market strength, which is likely to further accelerate the transition and increase the country’s dependence on gas and electricity imports.

EVOLVING ENERGY BALANCE

According to ICIS analytics, overall nameplate capacity in Germany is set to increase by 60GW between now and 2030. At the same time, retiring nuclear and coal or lignite plants will see over 25GW of firm baseload capacity taken offline.

While on a nameplate capacity basis, Germany is expecting to plug the gap with rapid expansion of renewables, the situation once de-rated factors are considered suggests a turning of the tide for supply security.

As Germany lacks a recognised capacity margin, the application of de-rating factors like that of Britain’s capacity margin, as used by system operator National Grid, reveals the extent of the shortfall in capacity.

A de-rated capacity rating accounts for the general availability of a plant, specific to each generation technology. Gas plants for example have far higher de-ratings of 80-90% than non-dispatchable solar and wind at 3-10%, according to the calculations.

On a de-rated basis, Germany will see a capacity shortfall of 2.5GW as early as 2022, expanding to over 5GW in 2023, ICIS analyst forecasts show. This suggests a growing reliance on gas-fired generation and electricity interconnectors in the coming years, with a deficit in place through to 2030.

Besides policy and regulatory factors, recent carbon market strength is expected to accelerate coal closures and increase the risk to overall supply security.

Although technical analysis of the recent trend reveals potential price resistance.

CARBON BULLS WEARY

The recent carbon bull-run has seen its price rocket 68% since the start of the year shattering the €50/tCO2e level on 12 May. Since then, it has gained a further €6/tCO2e but the upside recorded in week 19 has pushed the product into overbought status.

The relative strength index (RSI) is a trend indicator used to view if a product is deemed overbought or oversold.

A value of 70 is the threshold for overvalued contracts and could signal that a market is about to enter a sell-off.

At the end of week 19 the RSI for the emissions market hit 71 and on Monday morning the carbon benchmark was trading 1.7% down on its previous settlement.

An increasing carbon price will also push participants holding long positions to unwind hedges on the forward market which could result in more volumes of carbon being sold.

The upcoming UK ETS auction set for 19 May could lead to larger sell-offs as UK participants who have been using the European emissions market for trade come to transact emissions certificates on the newly launched scheme.

Despite smaller downward corrections that are likely in the short term the broader picture is for carbon to increase which will further pressure coal and lignite generators.

COMMODITY MARKETS SQUEEZED

As for the German power market and surrounding hubs it is likely that electricity prices could gain to account for the marginal combined-cycle gas turbine plants brought into the mix due to high-priced emissions.

For a 40% efficiency coal-fired power plant the clean dark spread for June ‘21 delivery was in negative territory at -€2.36/MWh on 14 May. The Cal ‘22 clean dark spread was also negative at -€2.38/MWh.

However, the gas balance across northwest Europe has undergone an intense period of structural tightening with inventories in storage at 26 billion cubic metres bcm or just over 26% full.

The average Dutch TTF price for delivery across the remainder of summer was €26.55/MWh on 14 May, €21.24/MWh higher year on year. This reflects the tight storage picture and the need to attract LNG cargoes from export markets such as the US for restocking.

The impact of tightening global commodity markets and bullish carbon is not limited to Germany alone.

Surging carbon prices would likely lead to gas-fired generation pushing out coal across Europe, leading to a distorted European network which could lack sufficient firm generation capacity as a whole across some interconnected regions.