NORDIC POWER
as there are several different hydro producers, one producer cannot deviate much from other producers’ water values. It mainly reflects a lack of supply, as in any other market. Another thing that is interesting to notice is that
the change in the mean scenario is quite limited even though the scenarios with 25% higher and lower SRMC coal are quite extreme. In the scenario with a 25% higher SRMC of coal the mean is €57.7/ MWh, €6.3/MWh higher than the mean in the base run. In the scenario with a 25% lower SRMC for coal, the mean is €48.3/MWh, or €3.1/MWh lower than the mean in the base run. In contrast, the 10 and 90 percentiles of the 150
different inflow and price scenarios of the base run are at €45.4 and 62.3/MWh respectively. The risk related to inflow uncertainty is probably greater than the risk related to changes in the marginal cost of coal. Given the current coal market, the 90 and 110 scenarios are probably more realistic, giving mean scenarios of €50-53.7/MWh. In terms of the base case illustrated in the chart, we see that even with the same amount of inflow over the period from November 1, 2010 to April 3, 2011, we get price scenarios that can easily deviate by €4/ MWh. The reason for this is the timing of the inflow. With low inflow in the beginning of the quarter, hydro producers will be concerned about whether they will manage to meet demand in the weeks before the snow thaw. But with more inflow early in the quarter, this concern will not be as acute. The table summarises these results. In
addition, a combination of the base case and the scenarios is added. The least extreme scenario – a 10% reduction or increase in the SRMC of coal and the 25-75 percentile of inflow could be considered a rather realistic space for where the front quarter will be delivered. There is then an interval of €46.2-61.4/MWh. Compared with the market price of €50.4/ MWh, the risk is biased towards the upside. If a trader entered a short position of 5 MW at €50.4/MWh, kept that position until delivery and the high price scenario was realised, then it would lead to a loss of €118 000. Of course it is not likely that a trader would keep such a short position as the market price rose, but it illustrates the potential losses – and gains – that can be made in a power market where there is a huge risk related to the hydrological development in addition to the general fuel price risk. These days the US housing index has lost most of its relevance
for the Nordic power market. And yet the question of whether the market has normalised has still not been fully resolved. What was normal before the commodities boom is no longer normal. The interconnection of the commodities markets is still there even though it is not as strong as it was in 2008. However, we have seen that the risk related to hydrological
uncertainty is probably greater than the risk related to changes in the marginal cost of coal – at least in the short term. That
Figure 5: Price & Inflow Scenarios for Q1–2011
The black squares are the high and low coal price scenarios. The yellow dots are the mean of the two scenarios.
Source: Point Carbon Thomson Reuters
said, with rising demand and limited supply it is probably only a question of time before commodity prices come under pressure again.
Expected Delivery Price, Q1–2011 Base Run & Fuel Price Scenarios
Inflow Percentiles Original run, hydro uncertainty
Fuel Price Scenarios Scenarios, fuel price uncertainty
Combination
10% 25% 75% 90% 45.4 46.9 53.4 62.3
10% 25% 75% 90% 48.3 50.0 53.7 57.7
43.7 46.2 61.4 68.6 Source: Point Carbon Thomson Reuters
At the time of writing, crude oil
was trading at its highest level since October 2008. In the short-run though, the main focus for traders in the Nordic power market will
In the short-run though, the main focus for traders in the Nordic power market will probably still be those lows coming in from the Atlantic ...
probably still be those lows coming in from the Atlantic, hitting the Norwegian mountains and releasing the resources needed in one of the most liquid power markets in the world. •
Lars Olav Fosse is an analyst with Point Carbon (a Thomson Reuters company), a leading provider of market intelligence, news, analysis,
forecasting and advisory services for the energy and environmental markets,
www.pointcarbon.com December 2010 57
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