Wind has emerged as a key renewable energy source (RES) technology throughout Europe, impacting cross-border electricity flows. Societe Generale analysis shows that Germany’s rising intermittent supply from wind and solar installations affects both flows and prices at home as well as in neighbouring countries such as France and the Netherlands, with a distinct seasonal effect.
During the winter season, high wind production in northern Germany tends to push German electricity prices down at the EEX – just at a time when France needs additional supply due to its lack of a sizable fleet of domestic peaking generation which leaves it vulnerable to demand swings during a cold spell.
Limited interconnector capacity, however, is acting as a constraint for power exports to a surge in wind power output, can leave Germany with negative power prices, while price in France or the Netherlands only go down marginally.
During the summer season, in contrast, Germany tends to import nuclear power from France. The two markets are complementary to some extent, as French demand tends to be very low in summer and quite sensitive to weather during winter, SocGen analyst Paolo Coghe explains. Yet, France’s inflexible generating fleet – dominated by nuclear – cannot provide adequate peak power supply when needed, so it relies on imports.
Rising price spreads amid interconnector limits
Overall, Germany is a sizable net exporter of electricity – despite the 2011 and 2015 nuclear retirements. With unchanged interconnector capacities, further rises in wind penetration are expected to put more downward pressure on German prices and lead to larger spreads between French and German power prices.
Interconnectors consequently become congested during these hours, Coghe said, forecasting “more hours with a price difference, but not necessarily higher spreads since these tend to get arbitraged away.”
According to data from the Statistisches Bundesamt, the average price for power imported by Germany from France was €42.3/MWh in 2014, while the price for the corresponding flow in the opposite direction was €47.2/MWh.
Germany also exports a lot of power to the Netherlands, with a favourable price spread. The average difference between the price of German power exports to the Netherlands and the price of Dutch power exports to Germany was equal to €4/MWh for the 2009-14.
Europe’s two-speed RES development
Renewables are making inroads throughout Europe, though not at the same speed or intensity. While Germany’s Energiewende policy has been accelerating wind and solar power deployment, France is a laggard in this context. With a share of production from renewables of less than 15%, France compares unfavourably with the EU28 average of 22%.
Pledges for a French Carbon Price Floor (CPF) could make all the difference. Markets reacted instantly when the French President Hollande announced France’s firm intention to unilaterally install a CPF for France’s electricity market – however, he fell short of disclosing a timeframe.
Putting a higher price on carbon helps push coal-fired capacity out of the merit order and enables gas-fired peaking plants to provide backup power for renewables. In Germany, cheaper fuel prices for lignite have made coal power plants take over that role – somewhat counterintuitive to the country’s clean energy aspirations.
In the UK, where a CPF was first introduced in April 2013, gas-fired power plants are at times the only fossil power plant being dispatched. The government raised the UK carbon floor price to £18.08/t on 1 April 2015, and it is set to rise further every year until 2020 to reach a targeted £30/t. This has introduced a premium for UK power vs European power, attracting imports to compensate for Britain’s loss of baseload capacity through shut-downs of ageing nuclear plants and LCPD-driven coal closures.