European countries are on course to break July’s record as the most expensive energy month ever, with just one week of the month remaining.
The new normal of records being broken hourly and daily is due to rising gas prices and reduced energy from renewables and nuclear power.
If the current trend continues, winter electricity prices will penalize European consumers large and small.
Another record-breaking week in European power markets, with both spot and futures prices hitting new highs, again mainly driven by the gas market, in addition to other fundamental supply drivers in nuclear, coal, hydro and other renewables.
As noted in last week’s note, August is on course to become the new record for most European markets, a picture that has only strengthened over the past week.
This applies to Italy, France, Germany, the UK and parts of the Nordic countries.
For the first time ever, a large European market could end up with a monthly average spot price of over €500 as Italy is averaging €504 so far this month.
As expected, week 34 also broke the weekly record for several markets, with Italy at the top again, hitting €506 for the week.
The gap between the different markets has closed significantly, with both France and Germany coming very close to Italian prices €486 or €481 for the week.
Prices have continued to rise at the start of week 34 and for the first time since early April, with the UK and France averaging over €600 per MWh so far this week, even higher than Italy.
Both the weekly and monthly records are therefore likely to be broken for most countries, which does not bode well for the coming winter.
The movement in the futures market was also very strong, with fresh new records in both short and long term contracts, mainly driven by the gas market.
Because gas is the marginal electricity producer in many countries for many hours of the day, electricity and gas contracts are typically highly correlated.
This has also been the case for the last few weeks, with very volatile gas prices but with a similar movement in the electricity market.
Most power contracts hit a new all-time high on August 22, when Germany’s front month topped €600 for the first time, closing at €613 per MWh.
Even higher prices were achieved in France, where the front month closed at €690 on the same day.
In the long term, things don’t look much better, because front-year contracts also reached new highs, in Germany they closed €645 and France €840 on Monday.
There has been a similar rise in front-year gas contracts, but gas prices have also hit new highs in short-term futures and spot contracts and were the main reason for record electricity prices.
TTF’s day-ahead spot contract broke its all-time high on Monday, closing at €272 per MWh.
The TTF front month was slightly higher, closing at €278 on the same day.
The reasons for the big increase were a further update of the European supply situation when sudden maintenance work on Nord Steam 1 was announced for the end of August, causing the power to shut down completely for three days.
Market participants fear that flows may not return at all afterwards, adding upward pressure on prices for market participants to secure their gas supplies.
On the positive side, injection levels into storage have remained healthy and total storage in Europe stood at 77.42% as of August 21st, getting closer to the EU target of 80% by November 1st.
Other reasons for the exceptionally high spot and futures electricity prices were the lack of nuclear and hydroelectric power, which affected the entire European supply throughout the year.
Additionally, coal continues to trade at very high levels, with European reference prices once again approaching $400 per tonne.
The front month contract API2 CIF ARA is now trading at $398 a tonne, its highest level since March.
Even at this price of coal, it is still a much cheaper source of power generation compared to gas at current fuel prices.
CO2 prices also hit a new all-time high last week, closing at €98 per tonne on August 19th.
Since then, prices have fallen sharply and at the time of writing are €90.8 per tonne.
Of late, there have been mixed drivers for the carbon move, with ultra-high clean dark spreads supporting the upside but, on the other hand, fears of an economic slowdown being a bearish factor.
The European Commission has approved a massive €27.5 billion German subsidy program to compensate energy-intensive companies.
The measure now approved will cover parts of the higher electricity prices resulting from the impact of CO2 prices on the levelized cost of electricity in the period 2021 to 2030.
The aim is to prevent so-called “carbon leakage”, in which companies relocate their production outside the EU to countries with less ambitious climate policies.
Nordic transmission system operators are urging Norway not to implement measures to limit electricity exports to neighboring countries, according to a joint response from Energinet, Svenska Kraftnat and Fingrid.
Norway’s transmission system operator Statnett and state-owned utility Statkraft have raised similar concerns with policymakers.
The government has not identified any criteria for a possible export ban and is awaiting guidance from the regulatory authority RME. – Fabian Roenningen
North America
Average electricity prices have started to cool off from summer spikes in the US, averaging $86 per MWh. However, daily minimum electricity prices are at an all-time high.
For the past week, average daily minimum power spot prices have rarely fallen below $50 per MWh, compared to May, when the average minimum was around $27 per MWh.
July had the highest average electricity prices of the summer at around $92 per MWh, but the average minimum over the same period was $42 per MWh.
Higher daily floor prices are a direct result of some of the highest-ever US coal and gas prices
Henry Hub’s natural gas spot prices last week were the highest since the Covid pandemic.
Coal spot prices also rose to record highs across the board last week.
Henry Hub’s average natural gas price reached over $9 per million British Thermal Units.
Although electricity demand is falling in concert with national temperatures, higher generation costs are driving up minimum generation costs. – James Ryan Kronk
Fabian Rønningen and James Ryan Kronk are analysts at Rystad Energy
Comments are closed.