September 29, 2016 / 11:17 AM / a year ago

European energy prices rally on French nuclear outage fears

* OPEC, winter, French nuclear fears spark price rallies

* Related coal, carbon markets also respond strongly

* Rally may be blip but could endure, traders say

By Vera Eckert

FRANKFURT, Sept 29 (Reuters) - A jump in European power prices for next year triggered by French plans to carry out tests on some nuclear reactors during the winter months has revived wholesale energy markets after years in the doldrums.

Traders were surprised at how quickly forward prices soared when news emerged on Wednesday of possible electricity output cuts in France, a nation of some 65 million people that relies on atomic energy for about three quarters of its power.

The European benchmark price for power next year, known as German Cal ‘17, has jumped 9 percent since early Wednesday. At just under 30 euros per megawatt hour, it is 40 percent above its 2016 low touched in February.

“While the French news is still nebulous, it provides a playground for traders that could go on for quite a while,” said a trader at a German utility. “It’s our job to exploit the new volatility and great to see the markets coming back to life.”

Prior to this week’s move, wholesale power prices have declined more or less continuously since 2011 due to competition from renewable energy, a global supply glut of coal, gas and oil, as well as sluggish demand, all of which have hit large utility companies.

French utility EDF said on Wednesday it would carry out more tests on 12 nuclear plants during planned outages this winter to check for high carbon concentrations in steam generator channel heads, which could weaken the ability of steel to prevent cracks spreading.

EDF, which has already lowered its nuclear output target for 2016 as a result of the outages, said the carbon tests could prolong the time the reactors are offline.

SUPPLY RISK

A power trader said if there were a severe cold spell this winter - such as five to 10 degrees Celsius below normal temperatures - the French system could struggle to meet peak demand as so many coal plants have closed in recent years.

Supply from neighbouring markets, such as Switzerland and Belgium, was also likely to be tight, the trader said.

Supply gaps in France could be made up by Germany, the biggest continental producer, but there are fears that demand elsewhere will go unmet if France takes priority.

“This is just an eventuality but it causes a highly nervous environment,” another trader said. “Speculators love it.”

France and Germany account for two thirds of western Europe’s power consumption. The region is eventually meant to become a unified energy market and more interconnectors and cross-border contracts are emerging.

The price of coal, which still accounts for a large share of German power generation, also clocked up big gains on Thursday. The cost of European Union carbon permits, which power producers buy to offset emissions, also increased.

Traders said there was a global coal price recovery in general, however, while a virtuous circle of different energy markets pushing each other higher was also a factor.

Higher oil prices supported power prices too on Thursday after a surprise move by producer cartel OPEC to curb the output of crude, which is often described as the energy sector’s “lead currency”.

The power price rallies extended to other regional markets, such as Britain and the Czech Republic. As of 0930 GMT, UK day-ahead baseload power had surged 29 percent to 46.75 pounds/MWh with traders citing the impact of European prices.

However, some cautioned that there was a certain amount of hype surrounding the French nuclear outage news and the gains may not be sustainable without some confirmation that supply will definitely be hit.

“It has not changed the fundamentals of generous supply,” a BayernLB bank analyst said. “It is driven by quick trader responses.” (Additional reporting by Nina Chestney in London and Bate Felix in Paris; editing by David Clarke)

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