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  • August 1st, 2014

EU Power Set for Biggest Gain in 10 Months Amid Russia Sanctions

European power prices for next year are headed for the biggest monthly gains since September amid concern sanctions against Russia will boost the cost of coal and gas, raising production costs at utilities.

The German 2015 contract, Europe’s benchmark, climbed 2.2 percent in July, broker data compiled by Bloomberg show. Respective advances for equivalent French and Nordic prices of 1.3 percent and 4.8 percent are also the largest in 10 months.

European Union governments agreed July 29 on their most sweeping sanctions against Russia to date in another attempt to curb President Vladimir Putin’s intervention in Ukraine, raising concern the bloc may be more vulnerable to cuts in its supplies of natural gas and coal. The EU imported 46 percent of its gas from Russia last year, while coal imports from the eastern neighbor amounted to 31 percent of demand, data from the bloc’s statistics agency show.

“Traders bought in expectation of drastic sanctions against Russia and the potential impact on supply of gas and coal to Europe,” Nicolai Wuesten, a power market analyst at Energieunion GmbH, said yesterday by phone from Schwerin, Germany. “The market is nervous, because we are depending on Russian commodities.”

German power for 2015 reached 36.15 euros ($48.82) a megawatt-hour, the highest level in more than four months, on July 29 and traded at 35.20 euros at 10:16 a.m. Berlin time today, according to broker data. Coal for delivery to northwest Europe next year closed July 28 at a seven-week high of $80.50 a metric ton and settled yesterday at $78.80, broker data showed. Front-month U.K. natural gas gained for the two weeks through July 25 on ICE Futures Europe and traded today at 40.9 pence a therm ($6.90 a million British thermal units). The sanctions excluded Russia’s gas and coal industries.

“When sanctions were decided, the contract started falling again,” Wuesten said. “Traders were buying the rumor and selling the fact. The Cal 15 has room to drop to 33.50 euros a megawatt-hour by the end of this year if we see a mild winter,” he said, referring to the German contract for next year.

Sluggish development of industries that consume the most energy and growth of renewable generation will hurt German power demand, while coal prices are unlikely to rise for now, Barbara Lambrecht, a Frankfurt-based analyst at Commerzbank AG, said in a report e-mailed yesterday.

“The current price recovery is quickly likely to run out of steam,” Lambrecht said.

The German 2015 contract will average 36 euros this year on the European Energy Exchange AG, according to the bank’s forecast.

Polish electricity for delivery in 2015 climbed 0.7 percent in July and is poised for a record streak of eight monthly gains. Prices were aided by a capacity premium that utilities get from the transmission operator for making plants available for reserve capacity at peak times. The contract closed at 174.25 zloty ($56.03) a megawatt-hour yesterday, up 11 percent since the start of 2014, when the measure was introduced.

“With local coal prices falling and renewable output rising, the reserve capacity mechanism seems key,” Witold Pawlowski, general director of CEZ Trade Polska, a Warsaw-based unit of the largest Czech electricity producer, said yesterday by phone. “It generates oversupply on the balancing market, while curbing spot supplies and pushing forwards higher.”

German average temperatures next week are forecast at 21.4 degrees Celsius (70.5 degrees Fahrenheit), 2.8 degrees above the seasonal norm, while the average for northwest Europe and the U.K. will exceed the seasonal norm of 18.5 degrees by 2.2 degrees, according to WSI data using the GFS model.

Temperatures in the Nordic region will average 22 degrees, 5.5 degrees higher than the seasonal norm, the model showed.

Nordic nuclear output was stable today at 75 percent of capacity, data from operators showed. Electricite de France SA (EDF) cut output from its Gravelines-1 French reactor to 360 megawatts, while the 595-megawatt Provence-5 coal-plant unit was halted, French grid operator RTE said. No U.K. power plants were shut this morning, according to reports from generators.

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