Weaker economic activity amid the COVID-19 pandemic has reduced S&P Global Ratings' base-case assumptions for power prices in some of Europe's main markets by up to 20% in 2020-2021 compared to its previous assumptions in November 2019. This is despite a drastic cut in French nuclear power production rates over the coming three years.
In its latest semiannual report on the sector published today, "The Energy Transition And What It Means For European Power Prices And Producers: Midyear 2020 Update," S&P Global Ratings provides its credit insights for Europe's key utilities and power markets--Germany, France, the U.K., Italy, Spain, and the Nordics--supported by the market and price forecasts of S&P Global Platts Analytics. We are also hosting a webinar and Q&A on the credit implications of the pandemic for the power markets--see the details at the end of this article.
"The financial impact of the lower prices on our rated European power generators is generally manageable in 2020, thanks to price hedges," said S&P Global Ratings credit analyst Massimo Schiavo. "However, generators' hedging positions are less secure for 2021, with only about 30%-50% of total power generation contracted on average. This leaves 50%-70% that still needs to be hedged in an environment of lower prices," Mr. Schiavo added.
While generators still have time to decide on the best approach, the poorer economic prospects and subdued commodity prices do not suggest a strong rebound in power prices in the second half of 2020. We therefore may see greater pressure on the 2021 earnings of merchant power generators that provide baseload power, such as nuclear, coal-fired, or hydro power.
While we expect prices in 2020-2021 to be lower than our previous forecasts, we expect higher, more credit-supportive prices by 2022. This is because of a recovery in gas and carbon prices, and because Germany will become a net importer of energy, as opposed to an exporter of about 40 terawatt hours today. The gap in energy supply is likely to be filled with solar and wind power, which should grow to form about 45% of the European energy mix in 2030, from about 25% in 2019, excluding hydro's 10% share.
Furthermore, we believe that renewables will come to play a greater part in power price formation over the next decade. This is supported by EU leaders' recent commitment to the European Green Deal--a set of policies aimed at making Europe climate-neutral in 2050. The COVID-19 pandemic does not seem to have altered leaders' commitment to the deal, which we think could even be accelerated to help European economies rebound. However, we believe that the growth of renewables will entail more weather-related volatility in prices, as was the case early this year, when above-average wind and hydro production reduced power prices.
S&P Global Platts Analytics is a part of S&P Global Platts, which is a separate, individual division of S&P Global, as is S&P Global Ratings.
Join S&P Global analysts from Platts, Market Intelligence, and Ratings at a live webinar on Tuesday, June 9, 2020, at 4pm Central European Summer Time / 3pm British Summer Time / 10am Eastern Daylight Time / for an early review of the implications of the COVID-19 pandemic for the power markets, the energy transition, and the credit quality of power generators.
