Energy Prices in Europe: Predictions for Spring 2022 and Beyond

From stiffer competition for LNG to new price dynamics following the Core Flow-Based Market Coupling, Insight by Volue analysts tell us what is in store for the power market this spring and beyond.

#1 Stiffer competition for LNG

"In gas markets, the high prices and volatility are set to continue. Gas transit through Ukraine has been stable after the Russian invasion, with contractual nominations from European buyers being fulfilled, according to Gazprom. In the latest turn of events, Putin’s demand that gas should be paid in Russian rubles jolted markets again, causing renewed concern about escalating sanctions and how this could potentially impact supply.

In trying to wean off itself from Russian gas, Europe will rely on LNG to rebuild storages ahead of winter. Stiffer competition for the liquid commodity this spring and summer is to be expected as more Asian importers return to the spot market.

Also, proposed regulations on storage filling have reversed the summer/winter spread. The latest proposal from the European Commission calls for an 80% minimum filling rate by 1 November on a national level, this being a less strict target than previously communicated. But with winter contracts still currently trading below summer contracts, injections will likely rely on incentives implemented by EU member states. The details have yet to be mapped out.

Expected higher production from Norway this summer should provide relief, and if Russian exports are not interrupted there could be a downside potential for prices this summer. But a large risk premium due to the current geopolitical situation is certainly justified, and it will, unfortunately, be a part of the energy markets for a while."

Bjørn Inge Vik, market analyst specialising in LNG and carbon, Volue

#2 EU energy market reform

"The European Commission has set up an action plan called REPowerEU to reduce and eventually end Europe’s reliance on Russian natural gas. The goal is to accelerate the EU’s existing Fit for 55 plan, aiming for a 55 per cent reduction of carbon emissions by 2030, compared to 1990 levels.

In terms of energy prices and market actions, the Commission is looking into an energy market reform and seeks to keep electricity affordable without disrupting supply and further investment in the green transition. The “temporary price limits”, originally stated in the report, will be applied only to Spain and Portugal for the moment.

On the renewable energy side, the European Commission is pushing for EU countries to speed up procedures for granting permits and accelerate the rollout of rooftop solar PV systems, wind, heat pumps and biomethane to ensure energy security. Furthermore, rolling out renewable energy will contribute to more green hydrogen production, which is also needed to replace natural gas imports."

Anamaria Toebe, Senior Analyst, Volue

#3 Carbon prices predicted to come down

"In the carbon market, prices have been rollercoasting after the Russian invasion of Ukraine, and have recently been hovering at 75 €/t. We observe gas to hard coal and gas to lignite fuel switching over the last quarter, and this is likely to go on for some years, largely due to the very high gas prices. In order to tackle the energy crisis, and also to alleviate the dependency on Russian gas, I expect to see some EU member states recommissioning hard coal and lignite-fired plants, and postponing previously planned plant closures.

Although this will have a substantial effect on medium-term emissions, it will probably be more than negated by the effect of reduced industrial activity. The energy crisis is taking its toll on industrial output, in a period where we have seen recovery already being slow partly due to supply chain constraints and high raw material prices in some sectors.

Because of the latter, we expect current carbon prices to come somewhat down throughout the year."

Espen Andreassen, Senior Analyst, Volue

#4 New price dynamics following Core Flow-Based Market Coupling

The enlargement of the Flow-Based Market Coupling to the Core area this spring will require extending the focus of analysis adding all the fundamentals of the Eastern part of Europe in order to tackle and forecast the dynamics of the grid.

The backcast performed over the winter months with our short-term model shows interesting trends under Core Flow-Based with Germany and the Netherlands getting lower than market prices and Slovakia, Austria and Romania getting higher prices.

Silvia Messa, Senior Analyst, Volue

#5 Dry conditions in Europe affect power prices

After a winter characterised by drought in large parts of Europe, the dry conditions will prevail in many countries also in the weeks to come. Seasonal forecasts indicate a high probability of temperatures above normal for spring and the beginning of summer for all of Europe. There is also a signal for drier conditions than normal for spring, especially in southern Europe.

Silje Eriksen Holmen, Weather and hydro modelling, Volue