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Oct. 16 (Bloomberg) -- The lack of clarity on Germany’s energy policy is creating the most volatile power prices in seven months, boosting costs for industry in the engine of Europe’s economic recovery.
The 30-day historical volatility in the price of power for 2014 more than doubled in the past six weeks to the highest since March 4, data compiled by Bloomberg show. Prices are being whipsawed because Chancellor Angela Merkel, re-elected almost a month ago, has yet to give details on her pledge to amend the nation’s $750 billion solar and wind power program, according to CF Partners U.K. LLP, a London-based investment company focused on renewable energy and commodities.
Price swings in Europe’s biggest power market, exacerbated by plunging fuel and carbon costs, are making it harder for industrial users to plan purchases. The volatility is raising total costs and hindering investment in the $3.4 trillion economy, according to Maik Neubauer, a management consultant specializing in utilities and commodity markets and the former chief operating officer of the European Energy Exchange AG.
“Our problem right now is that we would like to buy our power mid-term, so for the next four to six quarters, but we prefer not to right now because of the high volatility in the market,” said Munich-based Christian Essers, the director of energy procurement at Wacker Chemie AG, Europe’s largest maker of polysilicon used in solar panels. “If volatility is higher for longer-term products, then we usually pay more for securing future costs.”
The 2014 contract dropped 1.8 percent this month after posting its first quarterly gain for 2 1/2 years in the three months through September, broker data compiled by Bloomberg show. It closed at 37.50 euros ($50.61) a megawatt-hour yesterday. Its 30-day volatility rose as high as 16 percent on Oct. 10, from less than 7 percent at the end of August.
German wholesale electricity prices retreated as the cost of hard coal, used to generate 19 percent of the nation’s power, dropped 13 percent in the past six months to the lowest level since 2009, broker data show. The cost of carbon permits to emit a ton of greenhouse gases fell 16 percent since Merkel’s victory Sept. 22, to a five-week low of 4.51 euros on ICE Futures Europe on Oct. 14. The contract closed at 4.96 euros yesterday.
“For a long time power has been a one-way trade with people expecting it to decrease gradually,” said Roland Vetter, the head of research at CF Partners. “The bet has become less clear with more talk about capacity closures, uncertainty about Merkel’s energy policy and slumping fuel costs making prices more volatile.”
Merkel has said changing the renewable-energy law will be her first priority after securing a third term. Her plan to source at least 35 percent of the nation’s power from mainly solar and wind by 2020, compared with 23 percent now, has pushed residential bills to more than twice the amount that utilities pay to deliver the electricity, as taxes and charges that subsidize the plan inflate prices, according to BDEW, a Berlin- based lobby group.
The chancellor, who still needs a coalition partner to resume control in parliament, plans to pick either the Social Democrats or the smaller Greens for formal talks with her Christian Democratic party before the first post-election session of Germany’s lower house on Oct. 22.
The Social Democrats want to streamline efforts to reform Germany’s energy law and make the switch to renewables more cost-efficient, its election manifesto said. The Greens are seeking to speed up the transition to solar and wind, and also want a minimum carbon price of 15 euros a ton, Jens Kendzia, a Green party spokesman, said in a Sept. 4 interview.
While there won’t be a big impact on prices if Merkel opts for an SPD coalition, a link-up with the Greens means carbon prices could rise by 1.5 euros a ton, which would translate into 50 cents or 1 euro a megawatt-hour for power, according to Konstantin Lenz, the Berlin-based managing director of Lenz Energy, which advises on energy markets.
Daily swings in the 2014 power contract averaged 1 percent this month, according to data compiled by Bloomberg. That’s the highest for the period since 2008, when the benchmark price rose or fell an average of 2 percent a day as the bankruptcy of Lehman Brothers Holdings Inc. roiled markets.
German power’s 30-day volatility measure is the second- highest in Europe’s three biggest electricity markets. Price swings in the Nordic region peaked at 17 percent on Oct. 10, while they rose to 12 percent in France on the same day, according to broker data compiled by Bloomberg.
“Large companies have to deal with larger capital and margin requirements in their risk management if volatility increases,” said Neubauer, who is based in Hamburg. “This means fewer investments in other areas which will have a direct impact on demand for goods and services in other industries,” he said.
Germany’s economy expanded 0.7 percent in second quarter, after stagnating in the first three months of the year, as the 17-nation euro area emerged from its longest-ever recession. The nation will expand 1.8 percent next year, from 0.5 percent in 2013, according to the mean of 57 economist estimates compiled by Bloomberg.
Trading on EEX reached a record last month, with traders buying and selling futures representing 178 terawatt-hours of power, the Leipzig, Germany-based exchange said Oct 7. Germany consumed 606 terawatt-hours of power in 2012. Trading beat the previous record set in March 2011, when prices surged on Merkel’s decision to shutter reactors following Japan’s Fukushima nuclear disaster.
“High volatility is good for us traders, because it means you can make more money,” said Min-Soo Park, an electricity trader at MVV Trading GmbH in Mannheim, Germany. “If you want to generate 10 or 15 euro cents on a contract that moves only 20 cents, then that can be difficult. But with a bigger price move, it’s easier to earn money on the market.”
--With assistance from Stefan Nicola in Berlin. Editors: Andrew Reierson, Lars Paulsson