From gas markets adjusting to the new geopolitical reality to price contrasts and volatility in the Nordics, Volue Insight analysts tell us what is in store for the power market.
Sep 23, 2022
This year has been all about Russian supply fears. In particular, the focus has been on the Nord Stream 1 pipeline. European gas prices spiked well above €300/MWh ahead of the announced maintenance at the end of August. Flows never resumed, with Gazprom continuing to blame western sanctions for preventing maintenance.
However, prices have fallen back since as the market has been calmed by good filling rates at European storages. The overall EU target of 80% filling by 1 November was reached already at the end of August, with the level currently standing at 85%.
Two main factors made this possible.
First, due to the high prices, Europe has been able to continuously attract loads of LNG supply from the global market. New import terminals coming into Europe this winter could enable even higher imports.
Second, the extreme prices have also led to significant demand destruction. All over Europe, the public sector is limiting lighting, heating and cooling, and the industrial sector is scaling back or shutting down production.
The EU is already well on track to achieving the agreed voluntary 15% demand cut this winter. In addition, strong Norwegian exports have also helped. Production is up 10% so far this year in what is now Europe’s – by far – biggest supplier.
It seems that sustained prices above €300/MWh this winter may not be necessary for Europe to push through without depleting storages, and that the current price level above €200/MWh has proven enough to attract LNG and cause demand reductions.
That said, a cold winter or possible further cuts in Russian supply on the Ukraine transit route are two risk factors that, again, could push prices higher.
Bjørn Inge Vik, Market Analyst specialising in LNG and carbon, Volue
This year, the winter will start more uncertain than ever. On one hand, some very bullish scenarios might materialize if, once again, the French nuclear capacity is reduced in the coming months.
In addition, the tensions in the gas market might bring back the spiralling prices that we already saw in the spot and in the futures markets over the past couple of months. Weeks with tight supply-demand on the continent are certainly in the cards.
On the other hand, a looming recession as well as the recent directives of the European Commission, might weigh in on the demand developments and determine surprisingly low prices in the market that currently, no one is taking into account.
Silvia Messa, Senior Analyst, Volue
For the majority of Europe, the past year has been characterised by a lack of rain, low river levels, and low hydro production compared to normal years.
According to UN’s Global Drought Observatory, the drought we saw this summer has probably been the worst in 500 years. Over the summer, two-thirds of Europe were under some kind of drought warning. Blistering heat waves made the situation even more severe, as high temperatures combined with very little rain left soils dry, hard, and repelling of water.
Heavy rainfall in August and September caused flash floods in many European countries. However, instead of being absorbed by the soil, the water pooled on the surface and caused flooding, severe damage and fatalities.
The status quo is that the rainfall has not given full relief to soils, and hydro reservoir levels are still significantly below normal for many countries.
Large parts of Europe are facing rainfall above normal this week, which will probably restore the hydrological balance and increase hydro reservoir levels to some extent.
The weather forecast for the following weeks indicates drier than normal conditions in southern Europe, so some areas, especially Iberia, Italy and France, will face continued deficits in reservoir levels and soil water in the weeks to come.
Seasonal forecasts for the winter indicate that higher temperatures than normal are most likely. The outlook for precipitation is more uncertain, especially for Central Western and Central Eastern Europe, while forecasts for Iberia and South Eastern Europe are on the dry side. We will most likely have less snow accumulation in Europe than normal, especially in the Alps.
Silje Eriksen Holmen, Weather and hydro modelling, Volue