With the recent increase in EU power forward prices, the question arises about the connection to other recently recovering markets such as gas and coal. A connection between these markets would be expected where these commodities are used as fuel for power production.
“While renewable sources account for an increasing share of power production, especially in Germany, solar production is comparably low in winter, and wind only accounts for a small fraction of power production. The power price may therefore currently not be very strongly affected by the effect of feed-in priorities for renewable energy.
“The supply indicators in terms of fuel costs may therefore currently be more important in determining power prices. Indeed, this can be seen from the 20-day rolling correlation of the power +1Q forward price to the gas and coal forward prices for the same period (Figure).
“Since the recent downward trend in both the coal and gas markets at the end of 2014, correlation between gas/coal and power has spiked and remained high except for a brief breakdown associated with the difference in the timing of the accelerated downward trend. Since the price recovery, correlation has again strongly increased, indicating fuel costs to currently be a strong determinant of power prices. Or is the power market simply following the general bullish sentiment of the energy market after all?