Trade War: What Can We Expect in the Energy Markets?

Despite two major global shocks - the COVID-19 pandemic and the invasion of Ukraine followed by the ensuing energy crisis - the European economy has continued to grow over the past decade.

According to EUROSTAT, the EU’s GDP has grown by more than 15% since 2015 (European Statistical Monitor). Inflation currently stands at 2.5%, and the unemployment rate is near a record low of 5.7%.

Yet, in spite of these positive news, the Economic Sentiment Indicator has declined in recent months - particularly in the DACH region - while remaining more optimistic in Southern Europe.

One key trend to watch is the divergence in output between the industrial and services sectors. As illustrated in the chart below, traditional industrial production (dark blue line) has stagnated - especially after the gas crisis of 2022 - while service sector output has hit new highs almost every month over the past couple of years (European Statistical Monitor).

Zooming in on Germany, industrial power consumption, according to BDEW, has dropped by more than 16% since 2014. The chart from DESTATIS below highlights two key indices:

• In blue, the Industrial Production Index (manufacturing and mining)

• In red, the Production Index for Energy-Intensive Industries, which in 2024 is 20% lower than the 2015 baseline (index = 100).

One of the key drivers behind this industrial slowdown is Europe’s high electricity costs - significantly above those of global competitors like the US, China, and now even Japan.

The surge in ETS (Emissions Trading System) prices since 2020 has played a major role. Producing 1 MWh of energy with a CCGT (Combined Cycle Gas Turbine) emits around 0.4 tonnes of CO₂. 0.8 tonnes/MWh are emitted by a mid-efficiency coal plant. The cost of covering the carbon emissions is reflected in the so-called SRMC (Short-Run Marginal Costs), which represent the variable cost of conventional power plants.

Now, Europe faces a new economic threat: the emerging trade tensions and potential tariff escalations with the United States. What tariffs will be imposed by the US on European goods? And how will this affect commodity prices?

Focusing on the power sector, our analyst team covering Continental Europe and Japan within Insight by Volue has reassessed power consumption assumptions across all European countries. In particular, Germany and Italy, as major producers of goods exported to the US, are viewed as especially exposed to any tariff impacts.

For these two countries, we adjusted the total annual power consumption downwards by 2.5% for both 2026 and 2027, assuming a gradual recovery toward the end of the decade.

We then ran simulations in Insight’s new fundamental power market model under two key scenarios:

• Scenario 1 – Moderately Pessimistic: An additional 2% decline in consumption over the next two years.

• Scenario 2 – Strongly Pessimistic: A sharper 5% decline over the same period.

The results from the pan-European optimisation in Insight’s model offer a clear perspective on potential impacts to prices, cross-border flows, and the power balance. We used the consumption assumptions from both scenarios to test the outcomes.

Below, we show the results for Germany, using market closings for fuels and carbon as of 28 April.