ANALYSIS - European Industry Squeezed by Surging Power Prices
Author: Stuart Penson
Anglo-Dutch group Corus said on Wednesday it may shut a German aluminium plant because of high power costs, echoing threats by other producers and sounding alarm bells across the continent as experts said electricity prices have yet to peak.
"High power prices are really killing energy intensive industries," said Peter Claes, president of the European arm of the International Federation of Industrial Energy Consumers.
Claes called on the European Commission, which is probing high energy prices, to look closely at the structure of the continent's liberalised electricity markets and find ways to improve the way the sector is regulated.
Critics of Europe's market say a wave of consolidation has left big utilities like Germany's E.ON and Electricite de France
with too much influence.
Analysts said soaring prices for CO2 allowances issued under Europe's new emissions trading scheme are the main driver behind a power price rally that has seen forward contracts in France and Germany surge 30 percent since January.
British forward prices, also buoyed by record gas prices, have jumped 70 percent.
"Things will get worse (for power consumers) before they get better," said UBS analyst Per Lekander.
TIGHTER REGULATION LOOMS
Lekander said regulators might have to step in to tame runaway power prices, which were set to rise further on the back of CO2 prices.
"There is a significant chance of regulatory steps," he said.
Lekander predicted CO2 prices, which this week are at record levels around 23 euros a tonne, would climb to 30-40 euros in the near term, pushing record power prices up by five to 10 euros a megawatt hour.
Baseload power for 2006 on Wednesday hit record highs above 40 euros a megawatt hour in forward markets in France and Germany.
Prices for CO2 are climbing because high gas prices are discouraging power generators to carry on burning cheaper coal, which produces far more CO2 than gas and boosts demand for allowances to meet quotas under the emissions trading scheme.
Kim Keats Martinez, managing consultant at ICF Consulting in London, agreed that power prices were likely to go higher, citing a drought in Spain as another factor pumping up CO2 prices.
Dry conditions in Spain have cut power output from the country's hydro-electric stations, removing a key source of CO2-free power.
On Tuesday, Spain's grid cut power supplies to some industrial consumers in the north of the country due to shortages.
Italy, where consumers pay the highest bills in Europe, is to freeze power prices after the government said on Wednesday it had intervened to prevent forecast increases.