Electricity Prices in Europe: What Is Next

What are the drivers behind the extreme power prices in Continental Europe and the Nordics and what is in store for the foreseeable future? Volue Insight’s Senior Analyst Olav Johan Botnen explains.

Electricity Prices Europe 2022 Forecast

This winter, we have been on one of the wildest rides ever in the electricity market. And we are still in the middle of this wild ride.

What drove power prices in Europe up?

All this started with the cold winter one year ago. January and February of 2021 were very cold throughout the northern hemisphere. Asia, Europe and North America were affected. This led to a strong demand for gas and coal.

The cold winter was followed by a hot summer in Asia. The summer of 2021 saw an all-time high demand for air conditioning in Asia. This, too, meant a spike in the demand for gas and coal in a continent that is already the largest consumer of gas and coal in the world.

In the autumn, the demand for gas and coal didn’t go down because of a combination of low wind in Europe and somewhat cold weather in both Asia and Europe. On top of that, we saw a post-Covid increase in electricity demand in Asia, again driving the demand for gas and coal.

In China, we saw 28 per cent higher y-o-y demand for gas by September 2021. In total, Chinese power consumption increased by more than 10 per cent in the course of 2021. China is the major importer of gas and coal in the world.

Price spikes in gas and coal in Europe

In 2021, we observed all-time high prices for both gas and coal in Europe.

At the beginning of 2021, the price of global LNG (ref. Asia) was eight dollars in British thermal units. LNG ended the year with a spike at 58 dollars, a major increase. Even today, we still have very high LNG prices throughout the world.

For coal (ref. ARA), the year started at 70 dollars per ton and went up to 230 dollars in November, an all-time high.

Unlike previous periods, this time around we are witnessing a long period with high prices. Normally, high prices don’t last that long. But now they have lasted a full season for both LNG and coal.

This had an unfortunate effect on Europe. In 2021, LNG imports collapsed because of the very high Asian energy prices. The European gas prices were somewhat lower over the same period and Europe couldn’t find any LNG cargoes.

But finally, there was a price spike in Europe and, at the end of 2021, gas prices were higher than Asian prices. This made it possible to contract imports of LNG cargoes and now (a couple of months later), we see large numbers of cargo ships coming into Europe.

Reflections on the TTF gas price

When it comes to the TTF gas price, in the summer of 2021 it started a long trip upwards. It had a spike before Christmas and currently, we are at 80 Euro per MWh for TTF gas. This is approximately 10 times higher than what we had in 2019.

The major reason for this is the low Russian pipeline gas supply throughout the autumn and this winter. In 2019, Europe received approximately 400 million cubic meters per day on average. In 2021, we were down to approximately 300 million cubic meters. 2022 started at a very low level – approximately half of what we had in 2019 in terms of Russian imports.

Russia provides 35 per cent of the European gas.

In addition to the low supply, we are starting the new year with very low storage levels. As if this was not enough, we have serious geopolitical concerns over a possible conflict between Russia and Ukraine. The result is that currently, we have 8-12 doubled market price levels for gas. Clearly, we are still in the middle of the crisis.

More factors for the continuing high power prices in Europe

The coal prices continue to be high. One reason is that Indonesia, the world’s largest coal exporter, cut their coal exports with a ban for a five-week period.

At the same time, the EU carbon scheme is tightening. Prices increased strongly last year. The price per ton jumped from 30 Euro to 80 Euro in the trading scheme last year. EUA is now a record 96 Euros.

The SRMC (Short Run Marginal Cost) for gas-fired power generation increased from 50 (January 2021) to 400 (December 2021) Euro/MWh over 2021. It is currently close to 200 Euro/MWh after somewhat falling gas prices in 2022.

The SRMC for coal-fired power generation increased from 55 (January 2021) to 130 (December 2021) Euro/MWh).

These thermal generation costs are quite dramatic for Europe. During the energy transition, when the wind is low and the sun is not strong, Europe resorts to thermal power to fill in the gap and satisfy the demand for power.

Electricity Prices Europe Forecast

Some thoughts on Nordic power prices

The new cable links between Norway and Continental Europe mean that Nordic power prices in southern Norway and Sweden are strongly influenced by continental power prices. In Denmark, power prices are a complete reflection of German prices.

How did this happen? Until 2019 there was 2.5 GW of capacity between Norway and continental Europe. Today, it’s 5.3 GW (with the full capacity of the UK cable).

Another problem is the very weak connection between north and south in both Norway and Sweden. The connection north-south in Norway is limited to 400 MW, while north-south in Sweden it is limited to 5800 MW (reduced from 7300 MW due to Gothenburg-related constraints). This is an extreme bottleneck.

In addition to this, because of decommissioning of nuclear power outside Gothenburg, Norway can only import one-fourth of the Swedish power when needed. Up until now, this has been Norway’s backup. The lack of this backup is a very serious situation.

Some power grid upgrades are planned over the mid-2020s and during the 2030s and this will alleviate the bottleneck situation. At the same time, strong industrial consumption is coming to the north of Sweden and this will reduce the need for transmission capacity.

The current hydrological situation is not ideal for Norway, as the country relies on hydropower for most of its electricity. After an extremely dry summer, we observe that Norway has very low reservoir levels in the south. The Volue Insight forecast indicates that the value of stored water was at 140-150 Euro/MWh over this winter. This price is an all-time high for a winter season.

With low reservoir levels and very high prices in continental Europe, the south of Norway will have to align the area prices to match the extreme continental power price levels.

What’s next for fuel & emissions markets?

I will leave you with some quick thoughts.

  • There are 50 identified LNG cargoes arriving in Europe in the coming weeks.

  • The weather forecasts look milder and more windy than normal until late February.

  • The price levels are not sustainable at these extreme levels and there is likely to be some demand response in the pipeline.

  • We expect more global LNG supply and more European LNG terminals by mid-2020s.

  • We expect long-term changes in European policies: quicker development of renewables (and nuclear) generation and hydrogen electrolysers.

So it is fair to expect lower gas prices in the pipeline when the low gas storage levels are recovered and gas supply is normalised.

But one question remains unanswered. Will there be a major conflict between Russia and Ukraine and would that lead to a large drop in pipeline gas supply to Europe?

If this happens, there is the possibility that we will see an extreme, all-time high for SRMC of gas-fired power contracts for 2022-2023. But this risk is regarded as low by most experts.

About Insight by Volue

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