Power Markets in Europe: Predictions for Summer 2022

From gas markets adjusting to the new geopolitical reality to price contrasts and volatility in the Nordics, Insight by Volue analysts tell us what is in store for the power market.

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#1 Nord Stream 1 supply restrictions jolt gas markets

In the run-up to summer, gas markets in Europe appear increasingly comfortable. Although prices are at historically high levels, the market is adjusting to the new geopolitical reality and to the supply reductions after Russia cut deliveries to several countries. Storage levels are normalising as LNG keeps coming into Europe.

Since mid-June, flows through Nord Stream 1 are restricted to 40 per cent of capacity. Gazprom points the finger at sanctions preventing a turbine from being shipped back to Russia after an overhaul in Canada. Nord Stream 1 has for some time delivered the bulk of Russian gas to Europe at a stable rate, and some are very concerned that Russia now plays on the situation to put further pressure on Europe’s already strained energy system. Adding to the woes, the Freeport LNG export in the US has been offline for more than three weeks after a fire, removing 20% of US export capacity.

The prospect for Nord Stream 1 flows this summer is highly uncertain and the Freeport outage makes replacement gas in the form of LNG more expensive for Europe. To reduce demand, several countries are scrambling to dust off sidelined coal plants and to have plans ready in case of acute supply shortages. Filling storages ahead of winter is a priority and the EU average target of 80% full by 1 November is still within reach, but it will come at a high price. This summer will certainly be much tighter than market participants foresaw just a few weeks ago.

Bjørn Inge Vik, Market Analyst specialising in LNG and carbon, Volue

#2 Bearish factors looming for carbon prices

Carbon prices have for some months remained mostly in the 80-90 €/t range, sustained by the tighter market that the EU’s ‘Fit for 55’ package will usher in. We expect that some measures from the European Commission’s recent ‘REPowerEU’ proposal will have bearish implications for the medium-term supply/demand development. Some 200-250 Mt of previously unexpected volumes will be injected into the EU ETS market in the medium term to raise revenues to finance measures from the proposal. And a tremendous increase in the 2025 EU-27 solar growth ambitions from the 'REPowerEU' will alleviate power sector emissions.

In addition to that, we expect the weak European macroeconomic outlook and the energy crisis to affect EU-27 power demand, impacting the emissions over the next couple of years. Lower nuclear power output and higher consumption of hard coal and lignite in thermal power generation will offset this only slightly.

Espen Andreassen, Senior Analyst, Volue

#3 Warm and dry summer in Europe

May and June have been characterised by less precipitation than normal for most of Europe. This has largely affected river flow, inflow levels and hydro reservoir levels. For example, Italy is experiencing the worst drought in 70 years.

The weather outlook for the summer and autumn indicates that the warm and dry conditions that have affected Europe in recent months will continue. The probability of higher temperatures than normal is strikingly high. The signal for precipitation is somewhat weaker than for temperature, but lower precipitation than normal is most likely.

Silje Eriksen Holmen, Weather and hydro modelling, Volue

#4 Tight supply-demand in Continental Europe

In Continental Europe, the rest of the summer will be characterised by tight supply-demand. We see the risk for strong prices all over Europe due to the bullish fuel effect on one hand and, on the other, the worryingly low river levels in several countries such as Italy and France – something that might lead to a severe reduction in thermal and nuclear power output.

Silvia Messa, Senior Analyst, Volue

#5 Price contrasts and volatility in the Nordics

In northern Norway, we might see prices below 10€ throughout the summer in stark contrast to prices in southern Norway where they may go up above 250€/MWh during next winter.

Swedish prices will be volatile and shift from very low prices to European prices depending on the wind.

Tor Reier Lilleholt, Head of Market Analysis, Volue

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