What drives power prices in Croatia En.trading 013 What drives power prices in Croatia M.Sc. Borut Janša Mentor EBS d.o.o. Experts for emerging power markets Energy Business Science

Subject What drives power prices in Croatia? Will Croatian wholesale prices rise or fall when joining the EU? What will be the regional impact of Croatia joining the EU markets? The market logic will not change with Croatia joining the EU, but further development of Croatian power market will have impact.

Agenda Short Introduction What changes with Croatia entering EU How power price is defined? Croatian power market structure import, export, pricing zones What are the power price drivers in Croatia Hydrology Gas price, Coal price, CO2 price

Short Introduction M.Sc. Borut Janša Education Master of Science (MSc), Business Informatics, Finance Bachelor of Science (BS), Theoretical and Mathematical Physics Employment Head of market and portfolio intelligence – Gen I d.o.o. (3 years) Acting risk manager - Gen I d.o.o. (1 year) Power Trader - Gen I d.o.o. (1 year) Fund manager – Ilirika DZU d.o.o. (3 years) IT project manager (9 years) Mentor EBS d.o.o. (Energy, Business, Science) Experts for emerging power markets – SEE region Established in 2000, entered into power business in 2013 Consulting, Education, Regional management, Outsourcing, Prop trading

What changes with Croatia entering in EU 2013 Croatia becomes member of EU ETS - EU emissions trading schema Eligible consumers Longer period Local company for trading will not be required More trading companies will increase competition

How power price is defined? Wholesale price (market price) Assumption: We have efficient market units are using marginal price – (fuel price, CO2 price, fixed price), the price is optimized. System of marginal prices and merit order The price is defined for each hour

Supply (Merit order) / Demand curve Nuclear Lignite new Coal old Units must run (wind, solar, hydro) Units working power(MW) Marginal price (EUR) Gas Oil Consumption Market price(EUR) CO2 costs

Merit order with import of electricity and congestion Nuclear Lignite new Coal old Units must run (wind, solar, hydro) Units working power(MW) Marginal price (EUR) Gas Oil Consumption Market price(EUR) CO2 cost Import Capacity of CBTC Price of imported power Price of CBTC

Merit order with import of electricity and NO congestion Nuclear Lignite new Coal old Units must run (wind, solar, hydro) Units working power(MW) Marginal price (EUR) Gas Oil Consumption Market price(EUR) CO2 costs Import Capacity of CBTC Price of imported power

Croatia – Net import Croatia is net importer

Croatia - Hourly net import High volatility of hourly net import requires hourly approach in price forecasting. source: MKOnline

Croatia - NTC Total NTC: Estimation of net hourly position: import: 3500 MW export: 2300 MW Estimation of net hourly position: min: -20oo MW max: + 500 MW Conclusion: Croatia have congestion at least on one border source: Entsoe.net

Price zone in SEE region – lack of power in the region (example bad hydrology) Price zone is formed when not enough energy is in the region and there are congestions on northern borders because of import

Price zone in SEE region – including Romania and Bulgaria Sometimes it is also possible that there is no congestion between Romania/Bulgaria and the region. Changes in export fees from Romania and Bulgaria can have significant impact on price.

German price zone – export of power from region (example good hydrology) German price zone is formed when there is no congestion on northern borders that usually when SEE region exports energy German price defines regional prices.

Variation of hydro production in SEE price zone markets We don‘t have Albanian hydro production. Our estimation is that Albania can add 400 MW to monthly deviation.

Influence of temperatures on consumption Croatia Hungary source: MKOnline

Influence of temperatures on consumption Serbia Slovenia

What are the price drivers in Croatia? SEE price zone – lack of power in the region Precipitation (region, Danube); Changes in NTC (maintenance, political decisions); Gas and CO2 price (Hungarian gas units define price); Temperatures (hot summer additionally increase consumption) Industrial production growth in SEE region; Situation in Greece, Italy, Turkey; Numerous markets with different characteristics: regulatory changes, changes in export fees from Bulgaria and Romania, lack of market depth, different auction principles on the borders.

What are the price drivers in Croatia? German price zone – export of power from region Gas (oil) price; Coal price; CO2 price; Hydro potential in Alps; Wind and photovoltaic production in Germany; Changes in maintenance plans of nuclear reactors in France and Germany; Industrial production growth in western Europe.

Will Croatian wholesale prices rise or fall when joining the EU? Croatia joined EU ETS at the beginning of 2013, so joining the EU will not have additional impact on the prices. Eligible consumers will not have significant impact on the prices. Market depth will increase, but only on longer terms. Market coupling will make market more efficient, however this requires some time. Market will become more efficient, but the market logic will remain.

What will be the regional impact of Croatia joining the EU markets? Deregulation in Croatia will speed deregulation on other markets; Competition on regional markets will increase.

Price expectations for Croatia CO2 – more upside potential, 3 EUR: the minimal price, depends on back loading voting; Gas price – slow upside potential; Coal price – support at current levels; Hydrology (precipitation) – already above normal from 20% to 50% - more downside potential; Regulatory changes; General – more upside potential – less for current year, but more for the next years.