2021: The Year of Power Market Records
In 2021, we got used to seeing new historic maximum levels both in delivery in the spot exchanges and on the futures markets throughout Europe.
But what were the main drivers that – since September last year – have created what many refer to as the “European energy crisis”, and what records were set?
Graph 1 shows the development for the German market of the daily baseload (Source EPEX Spot) vs. calendar ahead closing (Source EEX).
Graph 2 shows the monthly baseload prices vs. the SRMC for a mid efficient CCGT @TTF.
Graph 3 shows the spot monthly base development in percentages.
#1 Four-fold increase of TTF for gas
Without a doubt, the most relevant driver for the high power prices was the surge in gas prices.
Gas storages across Europe running low since February 2021, ongoing competition with Asian markets for LNG gas supplies, reduced Russian exports to Europe, gas supplies from the long-awaited Nord Stream 2 pipeline delayed: the combination of all these factors led to the increase of TTF four-fold between 2020 and 2021.
Graph 4 shows TTF month-ahead closing prices.
#2 CCGTs more expensive than coal
As a consequence of the high gas prices – and despite the lift on the carbon market – since July, the short-run marginal costs of combined cycles (CCGTs) have become more expensive than those of coal units. After a couple of years of thermal SRMCs at a fairly similar level, the coal units dispatch won the competition versus the less polluting combined cycle and, as shown in graph 6, marked a relevant year-on-year increase mainly in Central West Europe.
Graph 5 shows SRMC gas vs. coal.
Graph 6 shows the total coal production in Central West Europe.
#3 Huge drop in French nuclear production
The graphs below show how the available capacity derived by the UMMs was reduced between the end of September and the end of November by 3-6 GW resulting – on the right side – in a much lower production year-on-year. On top of this, the fear of further reductions for the rest of the winter added a strong risk premium to the traded products on screen for January, February and Q1 2022.
Graphs 7 and 8 show the expected available nuclear capacity from UMMs and the French nuclear production 2021 vs. 2020.
#4 OTC market at unprecedented levels
In terms of power consumption, after the drop in 2020 due to the outbreak of the pandemic, 2021 shows a return to pre-covid levels for most of Europe. Q4 was characterised by a short cold spell that brought up the French demand above 80 GW per hour for a few days. This impacted the spot exchanges in the continental area and together with some cold weather scenarios still on the cards for the rest of the winter, lifted the OTC market to unprecedented levels. On 23 December, the February peak in France closed on the EEX futures market at 1925,7 Euro/MWh.
#5 Hydropower reservoirs below normal
The levels of the OTC for the previous months and quarter determined an increase in the so-called Water Values (WV) of the hydro storage plants of the Alpine region. The WV represent the level at which hydropower producers are willing to sell into the spot exchange and are dependent on one hand on the scarcity/availability in the reservoirs and on the other, on the 'alternative' prices, typically, during the winter months, the peak prices of the month/s ahead.
Graphs 9 and 10 show the Central West Europe hydro reservoir level and total power production.
Due to the wet weather over Christmas, the reservoirs are now almost back to normal. However, the snow/groundwater resources are well below normal so inflows are expected to be low. In our forecast, this indicates that reservoir production will remain below normal going forward.
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Looking ahead, due to the unprecedented increase of power prices and energy bills, we expect a drop in industrial consumption for the EU 27+UK area of at least 50 TWh for the year 2022. Especially impacted, all over Europe, are the energy-intensive industrial sectors such as steel, cement, chemicals and paper production.
Are there more records in store for 2022? Without a doubt there will be records set this year as well. As usual, we will be keeping an eye on the power markets.