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London — European power prices are set to continue recovering into 2019 on tightening conventional supply margins, with price forecasts showing average prices up 57% from the market's 2016 low point.

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Power prices across continental Europe's four biggest markets (EU4) are set to average around Eur58/MWh ($65.74/MWh) in 2019 versus Eur54/MWh in 2018 and Eur37/MWh back in 2016, according to November 30 forecasts from S&P Global Platts Analytics.

A key driver of power price inflation this year has been rising CO2 costs, with EU Allowances tripling in value over the last 12 months. A full year at this sustained level, or higher as many analysts expect, would further support power prices.

A potential mitigating factor would be cheaper feedstocks, with gas and coal prices already coming off multi-year highs on the back of a more bearish global energy complex.

"We see significant gas price falls vs 2018 due to high LNG and storage back to normal," raising the potential for coal-to-gas switching in summer 2019, Platts Analytics head of power Glenn Rickson said.

That improves the outlook for gas-fired generators after a disappointing 2018, which saw gas-fired output across EU4 markets fall by 4 GW compared to 2017, TSO data showed.

Coal output was also down, although German coal plants registered a rebound this winter with clean dark spreads still just ahead of clean spark spreads even for lower efficiency coal units.

For 2019, coal demand across Western Europe is seen stable following two years of sharp declines, with anticipated coal plant closures less pronounced than in previous years.

European natural gas market faces key first quarter period

The European natural gas market has seen some dramatic changes year on year so far during the final quarter of 2018, with pricing seen volatile after crashing recently with multi-year highs seen at the beginning of the Winter 2018/19 season.

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Nevertheless politically determined coal phase-outs are looming, with a German exit timetable expected in 2019, while next year is make-your-mind-up time on air quality investments.

Europe's hard coal- and lignite-fired power stations have until summer 2021 to comply with revised air quality standards (LCP BREF).

Stack emission analysis indicates 108 coal plants in Europe are above the revised BREF and require significant investment to comply.

Expect asset sales as utility generators decide to hand thermal plant risk on to players like EPH.

While the price outlook may be stable, both coal and gas plant run times can expect to be squeezed further by ever rising wind and solar output, with both setting new records in 2018 and further growth expected for 2019.

NUCLEAR SWING FACTOR

French nuclear, meanwhile, looks set to remain the single-largest factor in European power deep into the 2020s, with the country's 50%-in-the-mix reduction target delayed to 2035.

Nuclear availability and output will remain a key source of uncertainty in 2019, however, with seven extended 10-year reactor reviews scheduled, and five reactor outages due to start in January/February -- a fact noted with some concern by TSO RTE in its Winter Outlook.

Another uncertainty for 2019 is how RWE will manage the Hambach court ruling. As things stand the generator foresees an output cut from its lignite plants of up to 13 TWh/year.

A final verdict in the case preventing forest clearance is expected in late 2020.

"The impact on German prices should be less than Eur1/MWh in 2019-2020 assuming limited optimization of the RWE lignite fleet, but in an uncertain context about coal closures, this can become a material bullish element for German prices," Platts Analytics Giuliano Bordignon said.

SUBSIDY-FREE RES

2019 will see Europe's first major subsidy-free renewables projects completed in Spanish solar and Nordic onshore wind.

These projects face the new phenomenon of cannibalization -- reduced capture prices in the wholesale market due to the boom in wind and solar capacity.

The need for PPAs to mitigate this merchant risk is becoming an essential component in new RES finance.

Developers are forging ever-closer links with vendors to maintain a steady pipeline of projects supported by corporate PPAs.

Europe is still several years away from subsidy-free renewables, and the direction of bids for new projects across Europe will be keenly observed after onshore wind prices edged up in German auctions in 2018.

The country is to tender for over 18 GW of new wind and solar capacity through 2019 to 2021.

The UK, meanwhile, is due to hold in May its next Contract for Difference auction, with offshore wind costs due another haircut.

INTERCONNECTION DRIVE

New interconnection features heavily over the next two years, meanwhile, with up to 8 GW of capacity set to come online.

The 1 GW Nemo link between Belgium and the UK is now in testing and is set to commission in Q1 2019, followed by the COBRA cable from Denmark to the Netherlands.

The UK-France Eleclink and a new France-Italy link are also set to start before 2020. Two cables from Norway to Germany and the UK, the Belgium-Germany link and a third UK-France link should follow soon afterwards.

Finally demand for electricity is seen stable for 2019, with electrification of transport, heat and industry beyond the scope of this article, even if we can expect strong newsflow on batteries, EVs and power-to-gas projects.

2019 European Power Market Events

Q1 1 GW Nemo cable UK-Belgium go-live
February German Coal Commission report deadline
April Brexit transition phase starts (tbc)
Q2/Q3 French nuclear maintenance (10-year-reviews)
May EU parliamentary elections
H1 2030 Climate Laws (Germany, Netherlands)
H1 Dutch carbon floor price decision for 2020
Q3 700 MW Cobra cable DK-NL go-live
Oct German 1 GW lignite reserve closures
Q4 French 1.6 GW Flamanville 3 reactor fuel loading
Dec German 1.4 GW Philippsburg 2 reactor closure

Selected RES Auctions Timetable

February First of 14 German auctions for 5.8 GW wind, solar
March Dutch 700 MW Offshore Wind Borselle 3, 4
Q2 French 500 MW Offshore Wind Dunkirk
May UK CfD Auction (including offshore wind)

Source: S&P Global Platts

--Andreas Franke, andreas.franke@spglobal.com

--Edited by James Leech, newsdesk@spglobal.com