Power prices are not anticipated to return to pre-covid levels until at the least the middle of the decade if Britain suffers from depression as a result of the coronavirus pandemic.
Even if there is only a mild recession, prices are not expected to bounce back until 2022.
In a new report, analysts at Aurora Energy Research examined four potential scenarios for the economic impact of the novel coronavirus – from a mild recession across Europe to a global depression – and compared them to its pre-covid forecast from January 2020.
The consultancy had expected baseload power prices to average almost £50/MWh (2019 prices) in 2020, steadily rising to the high-50s by 2025.
If the lockdown is eased in the second quarter of this year and there is a mild recession in Europe, then power prices in Great Britain are now expected to fall to the high-30s in 2020 and return to £50/MWh by 2022. Growth is then expected to slow to a similar rate as before the pandemic.
However, in the other scenarios baseload prices are forecast to drop to the low-30s in 2020, and in two of them, prices are expected to continue falling to below £30/MWh in 2021. Although all three of these scenarios see prices rising thereafter, in the most severe case of a global recession, they are expected to remain 25 per cent below pre-covid levels in 2025.
Merchant renewables are expected to be among the worst affected asset classes, with the profitability of wind and solar falling by between 20 per cent and 45 per cent in 2020/21 depending on the scenario and technology.
Combined-cycle gas turbines are anticipated to fare somewhat better due to falling gas prices, with their profitability declining by between 5 per cent and 29 per cent, although not as well as their continental peers who have been made comparatively more competitive by the collapse in the price European carbon price.
Fossil generators in Great Britain are also subject to a top-up levy known as the Carbon Price Support, which now makes up a larger proportion of costs, and the phaseout of coal generation means there is less opportunity to gain market share than in countries such as Germany.
Asset profitability in 2020/21 compared to pre-covid forecast
Felix Chow-Kambitsch, head of commissioned projects in Western Europe at Aurora Energy Research, said: “The effect of Coronavirus has rippled through European energy markets – significantly reducing demand and prices of gas and electricity. European power utilities are likely to experience a significant fall in revenues in 2020, with merchant-exposed renewables schemes significantly affected.”
Speaking to Utility Week, ICIS head of European carbon and power analytics Marcus Ferdinand said the economics fallout from the coronavirus pandemic is also likely to have a long-lasting impact on the carbon market.
In one week at the start of March, the price of EU Emissions Trading System allowances fell by around a third from €24 to €16 per tonne.
The price has since rallied to around €21 per tonne after EDF lowered its forecast for nuclear output, primarily because of extended outages for maintenance. But Ferdinand said this recovery is likely to be short-lived.
The earlier drop was mainly the result of trading by speculators. As more emitters start adjusting their positions to reflect their new requirements, the price will resume falling: “If you look at the fundamental picture, we expect emissions to be down significantly when compared to the pre-crisis environment. It’s a generally loose market, I would say, because it’s the end of the third trading period so there quite a bit of supply coming to the market. The covid-19 crisis adds to that by creating lower demand.”
After the 2008 financial crash created a glut of allowances due to reduced economic activity, the EU introduced a market stability reserve (MSR) to soak up any excesses.
If the number of allowances in circulation exceeds 833 million 24 per cent of the surplus is withheld from the next round of auctions and transferred to the reserve. In 2024, a new mechanism will be introduced to cancel allowances if there are more in the reserve than were auctioned in the previous year.
“However,” said Ferdinand, “the market stability reserve was not designed to have an immediate impact on the supply side to react to such a crisis. It’s kind of a lagging instrument… The earliest point in time when this crisis will be buffered by the MSR is as of September next year.”