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Germany remains Europe’s industrial powerhouse and has so far escaped the crisis in the periphery rather unscathed. Despite the sharp fall in demand in the periphery, Germany has been able to maintain sizable trade surpluses, underscoring the fact that Northern Europe remains one of the most imbalanced trading blocks in the world.

“In our view, Germany’s economy hides significant weaknesses, though. Germany runs a negative trade balance for energy, which is on track to rise in coming years. High import costs of oil and gas will also likely put Germany at a big competitive disadvantage versus the United States, which is benefitting from cheap energy.” Bank of America Merrill Lynch said in a report citing the imbalance.

DE power prices have steadily declined on renewables & coal Germany’s electricity market is facing a challenging environment as a steady decline in power demand combined with a vast expansion in renewables has pushed down German electricity prices.

On BofAML estimates, the share of renewable capacity rose from 27% in 2006 to 50% in 2012, generating oversupply in the power market. The large weight of coal in Germany’s generation stack did not help power prices either, and the downward trend in coal and CO2 prices made coal look even more attractive relative to gas.

Thus, the bulk of the shutdown of 7 nuclear reactors last year was replaced with cheap and dirty coal rather than clean gas.

To sum up coal and renewables increasingly crowd out gas generation in Germany.

Going forward, the strong growth in renewables and continued net expansion in coal capacity will only add to the existing oversupply in the German market, at a time when power demand could fail to recover.

The higher share of renewables and depressed coal prices are putting many CCGT producers in Germany under severe stress. “We also see room for European thermal coal prices to fall further next year, which could add further downward pressure on German power prices.” the Bank added.

“We like using volatility to express a directional call in the market since the German power markets have been exhibiting a significant decline in implied vols. Thus, p uts on CAL 13 German baseload look attractive, in our view.” it concluded a research note.