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Gas plant operators to profit most from higher European power prices

* European power prices at multi-year highs

* Gas plants can reap profits from electricity they produce

* EDF (Paris: FR0010242511 - news) , consumers stand to lose out

By Nina Chestney

LONDON, Nov 8 (Reuters) - Gas-fired power plant operators will get the biggest boost from increases in European power prices as they reap higher profits from the electricity they produce from relatively cheap gas, while French utility EDF and consumers stand to lose out.

Tightening winter electricity supply in France due to several nuclear outages has seen a chain-reaction from other European power markets over the past six weeks, driving prices to multi-year highs, with volatility expected to continue into at least the first quarter next year.

French and German 2017 Q1 power prices have risen around 30 percent over the last six weeks to around 40 euros per megawatt hour (MWh), and British baseload Q1 2017 power has gone up around 25 percent to over 60 pounds/MWh.

Britain faces its own tight winter as domestic electricity generation fell to its lowest level in 20 years last year, increasing its reliance on imports from France which accounted for 4 percent of demand.

On Tuesday, French grid operator RTE said it might have to take measures such as power cuts in certain areas and voluntary cuts by industrial users to ensure electricity continues to be supplied to French homes this winter.

Natural gas, however, is relatively cheap as a fuel to generate electricity, compared to coal which has risen to multi-year highs.

"The spread, or the profits, the power generator will make for each megawatt of electricity it generates will be significantly higher than several months ago," said Tom Heggarty, research manager, primary fuel fundamentals at Wood Mackenzie.

"That will particularly benefit gas generators because we have seen a real strengthening in coal prices. The gas price has not strengthened enormously over the past few months but the price they receive for what they generate has gone up a lot."


Gas-fired power plant operators such as Centrica (LSE: CNA.L - news) and SSE (LSE: SSE.L - news) in Britain will benefit the most because the UK also has an additional carbon tax in place which raises the cost of producing power from coal even more than in Europe.

Large German utilities which can switch to gas from coal such as RWE (LSE: 0FUZ.L - news) also stand to benefit, as well as Russian gas exporter Gazprom.

"There is obviously a lot of extra gas demand across Europe as a result of the French nuclear situation. Gas producers are doing well out of it - Gazprom especially is able to sell a lot more into Europe without prices being suppressed," a source at a trading house said.

"They can almost sell unlimited volumes and because there's higher Asian liquefied natural gas (LNG) demand they are not seeing as much competition for market share from LNG producers, who are focusing on India, Korea and the Middle East (instead of Europe)," the source added.

The current series of unplanned nuclear reactor outages for safety inspections in France could reduce EDF's earnings by at least 1 billion euros, Les Echos reported.

The company has issued two profit warnings and cut its French nuclear output target three times this year.

"For EDF, we estimate that an additional 10 terrawatt hours of loss in nuclear output will hit earnings per share by 7 percent - this assumes that the lost nuclear output is contracted at 35 euros/MWh and is bought in the wholesale market at a similar price," analysts at investment bank Jefferies said.

All power generators hedge future output to lock in fuel prices and limit the impact of spot price swings on earnings.

EDF does not disclose its hedging policy but is likely to have followed a similar approach to other large European utilities and has hedged forward power sales for the rest of this year, most of next year and perhaps beyond.

"As a result ... EDF is unlikely to benefit from rising power prices to offset the expected shortfall in volumes, a credit negative," Paul Marty, vice president and senior credit officer at Moody's Investor Service, said in a note.

Consumers will also face higher power bills this winter as wholesale price rises are passed onto the retail market.

"EDF is going to have to pull back on how much it exports during the winter months which will drive up wholesale power prices and get passed onto the consumer," Heggarty said.

(Additional reporting by Oleg Vukmanovic; Editing by Veronica Brown and David Evans)

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