Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
European electricity prices soared in October—with German
year-ahead baseload prices rising to record highs—joining
commodities like oil that saw increased volatility as a result of
the COVID-19 pandemic.
Soaring natural gas and EU carbon allowance (EUA) prices whipped
power prices higher in Europe as post-pandemic economies increased
their need for energy, and prices for gas-fired power rose.
Chinese LNG import growth is the biggest single contributor, up
26% over the first eight months of the year. The spot price of gas
was four times higher than the four-year average and the price of
coal also rose, up from two-year lows last year.
Lower gas storage levels were seen at European facilities, a
metric analysts viewed as a barometer of global supply levels.
"Storage has played a key balancing role in 2021, but low levels
will limit its balancing role going forward, driving price
volatility," wrote IHS Markit Director Alun Davies in a report
outlining European gas market dynamics.
As cold weather continued into May, LNG import levels dropped.
UK gas production as well was down 27% from the prior year and
power sector demand for thermal generation remained strong as wind
power dropped to low levels, according to the report.
The resulting demand for gas from storage saw an 8 Bcm swing in
just two months from a 2 Bcm surplus to the five-year average to a
6 Bcm deficit by the end of May, the report found.
On 4 October, EU member state ministers in the policy group
Eurogroup received an update on recent energy price developments
from Cristian Zinglersen, director of the EU Agency for the
Cooperation of Energy Regulators (ACER).
The key price driver behind the events was global LNG supply and
demand, in particular spot LNG demand in Asia ahead of what is
expected to be a cold winter, according to a presentation from
Zinglersen.
To a lesser extent, Zinglersen blamed other factors as well:
increased use of power due to hot weather in Europe; rising coal
prices; and record carbon allowance prices. EUAs last week reached
their highest ever at €65/metric ton(mt), and carbon allowances in
the newly established UK system reached £76 (€88)/mt.
Hot weather last summer left Europe vulnerable, Zinglersen said,
as gas inventories fell below normal levels, exacerbated by
production that has been slow to rebound from the economic downturn
caused by the COVID-19 pandemic because producers invested
less.
Lower wind and hydropower generation recently, as well as
unstable pipeline gas supplies, made worse by lower investment in
the production of gas, exacerbated the price spike. "With similar
demand compared to 2019, the EU has in 2021 net approximately 10%
less gas supply at its disposal. So far, the gap has been picked up
by gas storage," wrote Zinglersen in the presentation.
He expected the tight market conditions would continue until
Spring 2022 when Russian gas flows would increase, possibly via the
new Nord Stream 2 pipeline, and shuttered LNG export terminals
would restart.
There did not appear to be any systematic manipulative behavior
or insider trading behind the LNG price volatility, but Zinglersen
noted that as economies push for greater electrification to meet
net-zero targets, and use pricing signals to drive energy use
changes, volatility was "here to stay" and comprised the "new
business model." Zinglersen recommended more cross-border energy
markets to prevent the use of costly, fossil-fired backstop
generation.
Despite the ACER director placing the most blame on lower gas
supplies, the far-right Hungarian Prime Minister Viktor Orban
pointed the finger at the EU's Fit for 55
carbon neutrality legislation. This has been encouraging
speculative investment in EUAs, a growing cost factor for
non-renewable power generators.
Favoring a more regulated approach, European Council President
Charles Michel said the European Commission is planning to publish
a "policy toolbox" to help national governments react to high gas
and power prices, for example a strategic gas reserve. A European
Council meeting where leaders are set to broach the issue is
scheduled for 21-22 October.
The office of the Presidency of the Council of the European
Union encouraged EU member states to share best practices but also
take collective action on new policies at the EU level in a 6
October statement.
The same day, EU Energy Commissioner Kadri Simson gave a speech explaining that member
states could quickly dole out "targeted support to consumers,
direct payments to those most at risk of energy poverty, cutting
energy taxes, shifting charges to general taxation."
President of the European Commission Ursula von der Leyen was
quoted as saying the EU should look into ways to decouple the price
of gas from the price of electricity.
State strategies in Europe
The energy price shock was foreshadowed last winter, when spot
prices at Europe's gas hubs rose as much as 21% year on year as LNG
cargoes were redirected towards more lucrative Asian markets, according to the EU's market
observatory for energy.
Germany has seen a 125% increase in baseload electricity prices
since last year, but this mostly came on the back of stronger
prices for gas and not the high carbon prices in the period,
according to the ACER presentation.
On 11 September, day-ahead wholesale power prices for the UK
reached a record £400.01 (€471.01) per MWh on the Epex Spot
exchange.
The high price was caused by several factors, research lead at
Aurora Energy Research Marlon Dey, told Net-Zero Business Daily.
"You'd normally expect around 30% of all power to come from wind
generation ... In 2021, it was just over 10%. So, it's around a
third of what we'd normally experience," said Dey.
"In September, in Great Britain, around 40% of our
combined-cycle gas turbine capacity was unavailable due to planned
and unplanned outages. And that's what created a very scarce
market. And on 15 September, to make things worse, due to a fire,
the IFA interconnector between the UK and France went out as well,"
he said.
"So, all of these capacity issues amounted to the system … being
very tight, with a very short amount of capacity left," he
added.
In the UK, nine electricity suppliers serving over 1.7 million
customers, or 6% of the market, ceased trading amid pressures on
profitability alongside regulatory obligations, ratings agency
Moody's said on 6 October. The UK
government is mulling support via loans and a "bad bank" for energy
suppliers, alongside tax relief for consumers, it said.
On 8 October, day-ahead average prices for wholesale electricity
in Spain and Portugal reached €229.20/MWh, according to EnergyLive
data.
On the same day, Italy's day-ahead power prices also topped
€229/MWh. Fortunately for consumers, the government on 23 September
decided to pass a bill securing
€3 billion to cut energy bills and taxes for retail consumers.
In Greece, where day-ahead electricity prices were €218.73/MWh
on 8 October, concerns had been rising. At a September meeting of
EU energy ministers, Greek energy minister Kostas Skrekas proposed
that EU states access funds from carbon trading auctions to relieve
costs paid by energy consumers, according to carbon consultancy
Redshaw Advisors.
Spain has experienced high prices since April, causing the
government to pledge to introduce laws that slash taxes and prices
for consumers. Further sticker shock could be on the cards due to
an escalating conflict between Spain, Algeria, and Morocco that threatens this month's renewal
of a contract for gas supplies via the GME pipeline.
French finance minister Bruno Le Maire and environment minister
Barbara Pompili wrote a letter to Eurogroup President Paschal
Donohoe arguing the EU should start to purchase gas collectively
for a strategic reserve.
Carbon, gas price dynamics
According to IHS Markit's international gas price tracker, the
benchmarks in Europe known as the Dutch TTF and the UK NBP showed
spot prices in late September exceeding €75/MWh, an increase of
500% compared with a year earlier, when they were about
€12/MWh.
Speaking at the Carbon Forward event on 6 October, Swedish
financial services group SEB's chief commodities research analyst,
Bjarne Schieldrop, said the high carbon price was not to blame for
driving the huge rally in gas prices since 2020, despite
generators' past switching from coal to gas to avoid high carbon
prices.
"I think right now, you know, gas is in a crazy situation where
it's going through the roof. Of course, the carbon price has
nothing to do with it," said Schieldrop, explaining that the market
still has a surplus of carbon allowances.
Nonetheless, in the coming years generators may struggle to cope
with the carbon price given the caps on carbon allowances proposed
under the EU's Fit for 55 legislative package.
"The mind-blowing thing about the propositions from the
[European] Commission this summer is that when you look at how the
[carbon] cap needs to decline in the ETS from 2021 to 2030, it
needs to decline by 50%," Rob Pulleyn, head of utilities and clean
energy at Morgan Stanley, told attendees at the Carbon Forward
event.
"At some time in the future, two or three years out, this paper
plan will crash with reality, because I think there are so many
companies, saying 'I just can't do this.' I mean, we are totally
and fundamentally a fossil fuel economy," he added.
Volue Insight Senior Analyst Espen Andreassen predicted high
carbon prices in the years ahead would continue to raise the cost
of power.
The installation of renewables needed to reach Europe's
decarbonization goals would require a higher carbon price, although
not as high as current carbon prices, he said. This was because, he
said, despite renewable power being cheaper than electricity from
CCGTs, its cost may rise as materials get pricier and the
technology development curve flattens out.
Posted 11 October 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability