The profit margins to run 50% efficient gas-fired plants in 2019 and 2020 hit record lows Monday with forward contracts experiencing a big sell-off after the British government said Friday that in the event of a "no-deal" Brexit the UK would be excluded from the EU's Emissions Trading System, traders said.
The ETS is a mechanism for helping to limit the impact of climate change by trading allowances to produce greenhouse gas emissions. If the UK leaves the EU bloc in March 2019 without a deal then it will also leave the ETS, the government said Friday as it published a series of papers setting out the implications of a no-deal Brexit, adding the situation remained unlikely given the work going on towards securing a negotiated outcome.
The clean spark spread for Season ahead, Summer 2019, fell to GBP2.71/MWh Monday, its lowest since July 2014. The clean spark spread is the gross margin of power produced at a 50%-efficient gas-fired power plant after accounting for the cost of gas, carbon price support, and emissions.
Profit-margins for Season ahead +1 contract, Winter 2019, fell to record lows Monday at GBP2.09/MWh. Summer 2020 (Season-ahead +2) followed the trend, hitting the lowest on record at GBP0.5247/MWh, and Winter 2020 (Season-ahead +3) fell to a record low of GBP0.4131/MWh.
Outright power contracts also fell sharply Monday. The Winter 2019 baseload contract fell by GBP1.85/MWh day on day to GBP52.35/MWh and saw 260 MW of volumes traded. The Summer 2020 base contract was down GBP1.85/MWh to GBP50.05/MWh with 210 MW volumes traded. Winter 2020 base traded at GBP56.15/MWh, down GBP1.35/MWh, with trading volumes at 175 MW during the day.
By Tuesday noon London time, 100 MW of Summer 2019 baseload contract, 130 MW of Winter 2019 base, 140 MW Summer 20 baseload and 20 MW Winter 2020 traded, a trader said.
"I would say that no-deal notices have created nervousness in the market...Some of the volumes I would say are the pass-and-parcel effect in the UK power market. Because we have four market markers...when they buy volume from an aggressive seller...they turn around and hit the next bid...as they don't want to hold the volumes in these volatile times," the trader said.
A second trader added: "The carbon has dropped, but the sparks are dropping much more, so this is the risk of hard Brexit."
On Tuesday at noon London time, the clean spark spread for forward contracts was heard edging up 20 pence day on day.
Despite this small uplift, market participants were likely to remain nervous of the market due to fears about price volatility.
"I think the sparks are almost unchanged as of now. For a hard Brexit, the UK will leave the ETS but keep the carbon tax. If that happens marginal cost on CCGT falls about GBP6.50 and on coal it falls about GBP15.00. Coal may run baseload all year. The government says it will increase the carbon tax by about GBP7.00...but in that case CCGT is GBP4 cheaper and coal is GBP8.50cheaper...Sparks were down about GBP1.50 yesterday. They could fall again, or rebound...It's a digital trade, and you have to guess the probability of each outcome," a third trader said.
