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Pressure on merchant-exposed baseload generators

London — A partial recovery in European power prices is expected between 2021 and 2023 as demand rebounds and more coal and nuclear power plants are shut down, but forecast prices are now about 20% below November 2019 estimates, S&P Global Ratings said June 9.

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This was despite a drastic cut in French nuclear power production rates over the next three years, the ratings agency said in a semi-annual report.

The report provides credit insights for Europe's key utilities and power markets supported by market and price forecasts from S&P Global Platts Analytics.

Since the start of 2020 European power prices have been dented by an average 5%-7% drop in demand due to the mildest winter in history, coronavirus lockdown measures, increased supply from renewables, and a drop in commodity prices, it said.

While the financial impact of lower prices on European power generators was generally manageable in 2020 due to price hedges, "generators' hedging positions are less secure for 2021, with only about 30%-50% of total power generation contracted on average. This leaves 50%-70% that still needs to be hedged in an environment of lower prices," the agency said.

Poorer economic prospects and subdued commodity prices did not suggest a strong rebound in power prices in the second half of 2020.

"We therefore may see greater pressure on the 2021 earnings of merchant power generators that provide baseload power, such as nuclear, coal-fired, or hydro power," it said.

By 2022 prices would be more supportive due to a recovery in gas and carbon prices, and because Germany would have become a net importer of energy, as opposed to an exporter of about 40 TWh now.

The gap in energy supply is likely to be filled with solar and wind power, which should grow to form about 45% of the European energy mix in 2030, from about 25% in 2019, excluding hydro's 10% share, the agency said.

"We believe that renewables will come to play a greater part in power price formation over the next decade," it said.

This was supported by EU leaders' commitment to the European Green Deal, aimed at making Europe climate-neutral in 2050.

"The COVID-19 pandemic does not seem to have altered leaders' commitment to the deal, which we think could even be accelerated to help European economies rebound," it said.

While increased renewables led to increased price volatility, the push for energy efficiency and deindustrialization in some countries was flattening demand.

"In addition, after three consecutive years of record-mild winters, we also see a risk that power demand could shrink on a sustainable basis compared to the previous decade. What's more, EU policies target a 32.5% reduction in total energy usage by 2030. However, the electrification of industry, heating, and transport could increase demand substantially five years from now," it said.

In summary, the profits of merchant-exposed baseload producers such as Statkraft, Electricite de France, Fortum, Uniper and Verbund may fall in 2021 and 2022.

For instance, S&P Ratings believed the contribution from Statkraft's flexible European production (mainly Norwegian hydro power, which generated NOK13.2 billion ($1.4 billion) in EBITDA last year) would deteriorate to NOK11 billion-NOK12 billion in 2020 and NOK8.5 billion-NOK9.5 billion in 2021.

European power prices: historical and expected development (Eur/MWh)

2018 historical
2019 historical
2020-2022 S&P Global Ratings' base-case assumption*
2020
2021
2022
Germany
44
37
41-46
42-44
43-47
France
50
39
45
42-44
44-46
UK
65
49
55-60
50-55
50-55
Italy
61
52
57-60
43-46
48-50
Spain
57
48
48-55
43-48
40-45

*These are assumptions used in S&P Global Ratings' base case and include a mix of hedges contracted by rated generators and forward prices. Data that S&P Global Platts uses include independent and verifiable data collected from actual market participants. Any user of the data should not rely on any information and/or assessment therein in making any investment, trading, risk management, or other decision

Source: S&P Global Ratings and S&P Global Platts Analytics