NORDIC POWER
By November 2008 the air was out of Figure 3: SRMC Coal & Hydrological Balance
the commodities bubble, and sub-prime had become part of everyday speech. Since then coal trading has been much more range bound. Taking the mean price over this period, the actual price was within a range of 20% on both sides of this mean for 90% of the time. By running simulations with the SDDP Nordic model, it is clear how changes in the marginal cost of coal affects the 150 different price scenarios from the base run. Four different simulations were run,
Source: Point Carbon Thomson Reuters
are used in this model. For each of these inflow scenarios the model generates a weekly price curve. Hence the result is 150 inflow and price combinations. All these scenarios are shown in Figure 4. The mean for all these scenarios
is the red dotted line at €51.4/ MWh. However, if the inflow is below the mean, it is clear that the average price in Q1 is lifted quite significantly. The reason for this is that the hydrological balance in the week beginning October 25 (week 43) was around -22 TWh taking into account the forecasted precipitation in week 43 and week 44. An inflow 10 TWh below the mean scenario - not forgetting that in the Nordic hydro system, a change in the hydro balance of 10 TWh can materialise from one week to another – could possibly lift the expected average price in the first quarter to around €60/MWh. On the other hand, the negative
hydro balance leads to few scenarios below the marginal cost of coal (€44.5/MWh in Q1-11 in the base case). Again it is clear that the marginal cost of coal is very important to the Nordic market even though coal fired plants that are not CHP only make up 6.2% of the installed capacity.
Two Different Coal Scenarios 56 December 2010 Source: Point Carbon Thomson Reuters
with 75, 90, 110 and 125% of the original marginal cost curve used in the base case. For the front quarter a change of 10% in the SRMC of coal means a change of €4.4/ MWh and a 10% change means a change of €11.1/MWh. In order to capture the effect on the connected markets, (the
Dutch and German markets), sensitivities from an in-house medium term model for the German market were used, and forward curves for the German and Dutch market were adjusted in line with this. The change is best illustrated by looking at the two most
extreme alternatives – a decrease and increase of 25 percentage points of the marginal cost of coal. The new combinations of price versus inflow are seen in Figure 5. The mean for the two different scenarios have been added as well. The first thing that is clear in Figure 5 is that the effect of
increasing the marginal cost of coal by 25% is stronger than the effect of reducing it by 25%. The reason for this is the hydrological deficit, so most scenarios are already well above the marginal cost of coal – given the current hydro balance, coal producers will be on the margin for only a few hours in Q1-11. This also implies that the hydro producers can lift their water values in line with the increase in the marginal cost of coal, without the risk of not producing later on as there is a lack of hydro resources. However,
Figure 4: Price Inflow Scenarios for Q1–2011 Inflow scenarios from November 1st
, 2010 to end Q1-2011
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