Power Markets in Europe: 5 Predictions for Autumn and Winter 2022
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.
Published
Sep 23, 2022
#1 Storage calms gas markets
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
#2 Energy crisis weighing in on carbon prices
Several times this year, carbon prices have been close to touching 100 €/t. However, recently carbon prices have dropped by approximately 25 €/t. To some extent, market awareness of the ongoing decline in power demand (caused by the energy crisis outweighing gas to coal and nuclear to thermal switching) has proved bearish for carbon prices.
More importantly, the possibility of market interventions in the carbon market is looming.
A one-off injection of 200-250 Mt of carbon allowances into EU ETS was proposed in May, in addition to strong solar power efforts, both being relevant for the front years. These factors can, combined with the ongoing decline in demand, lead to a laxer carbon balance for the front years than what the outlook was some time ago.
We now consider EU carbon policy developments to be the most important price driver for this autumn and winter.
Espen Andreassen, Senior Analyst, Volue
#3 High uncertainty for Continental Europe in the coming winter
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
#4 Price contrasts in the Nordics
This year, there have been huge differences within the Nordics with regard to hydro reservoirs, weather development, the fuel complex, water values, and area prices.
We have experienced record price spreads between the north and the south and two completely different situations related to the hydro reservoir levels.
The north experienced high levels of precipitation, hydro reservoirs reached close to maximum levels, and even a situation where water was let past power stations, as well as record low area prices.
The south was in a completely different situation with record low hydro reservoirs, demands from the government to reduce production to save water for the winter season, many discussions around rationing levels and restricting export levels, as well as record high water values and area prices.
The south was also heavily influenced by the tight energy balance in the European market this spring and summer and the high insecurity in the market caused by the Russia-Ukraine war.
Lower than normal levels of wind power production in the European market with extremely high gas and coal prices, a heatwave causing increased demand for cooling, and reduced nuclear production in France all affected the German power price and, in turn, the Nordic system price in the southern part of the Nordics – Denmark, Sweden, and the south of Norway.
Now, the focus is on the coming winter season. There is high uncertainty about the general energy balance this winter. It could cause very high prices during cold periods, demand reduction, and even destruction of demand because of the shutdown of businesses. The energy balance will be impacted by the low levels of hydro reservoirs in the south of Norway, heavily reduced Russian pipeline gas to Europe, and the uncertainty around nuclear production capacity in the Nordics.
On a positive note, gas storage levels are above EU targets ahead of schedule, LNG infrastructure projects are being delivered this fall in record time and coal-driven power units are back in production with an expected overall positive effect on the energy market this winter.
But the insecurity will not end after the winter season, and it may be even more intense next spring and summer. With a tight hydro reservoir situation all next year in the south, and a tight energy balance in Europe the big question is how this will affect the prices in the market next summer and fall when the market will prepare for winter 2023/2024 and build energy storage. This is the real uncertainty.
Lene Hagen, Senior Analyst, Volue
#5 Weather and hydro in Europe
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