Europe’s energy crisis is making the market nervous before winter


Round bales of straw drying in the field can be seen on August 10, 2021 in front of the RWE AG power plant near Rommerskirchen. The cost of natural gas and electricity has skyrocketed across Europe.

Ying Tang | NurPhoto | Getty Images

LONDON – European electricity prices have risen to multi-year highs in recent weeks due to a combination of factors ranging from extremely high raw material and CO2 prices to low wind power.

In addition, the energy price record run is unlikely to end anytime soon, and energy analysts are warning that market nervousness is likely to linger throughout the winter.

The October gas price at the Dutch TTF hub, a European benchmark, climbed to a record high of 79 euros (93.31 US dollars) per megawatt hour on Wednesday. The contract has increased more than 250% since January, according to Reuters, while benchmark power contracts in France and Germany have doubled.

In the UK, where electricity bills are now the most expensive in Europe, electricity prices have skyrocketed due to the country’s heavy reliance on gas and renewables for generating electricity.

UK day-ahead electricity prices rose nearly 19% on Wednesday to £ 475 ($ 656.5), Reuters reported. The contract was already trading near record highs shortly after a fire on an electricity link between the UK and France hampered imports of electricity to the UK.

“By far the biggest factor is gas prices,” Glenn Rickson, director of European power analysis at S&P Global Platts Analytics, emailed CNBC.

Higher gas prices have also been a “big driver” in pushing carbon and coal prices to record highs as well, Rickson said, although he noted that other contributing factors are at play, such as low wind generation and the unavailability of nuclear power plants on the island entire continent.

CO2 prices in Europe have almost tripled this year as the European Union reduced the supply of carbon credits. The EU benchmark carbon price climbed above 60 euros per ton for the first time in recent weeks and was trading slightly below this threshold on Thursday.

The EU’s emissions trading scheme is the world’s largest emissions trading program, covering around 40% of the bloc’s greenhouse gas emissions and charging emitters for every metric ton of carbon dioxide they emit. Record prices for CO2 have made the attractiveness of highly polluting energy sources even less attractive because, for example, coal emits more carbon dioxide when it is burned.

Rickson said the outlook for European electricity prices this winter will be “heavily dependent” on gas prices, adding that he expects gas prices to continue to rise in the coming months. “Apart from the ‘average’ picture, we expect a high price volatility with fluctuations from low or even negative hourly prices with high wind generation to very high prices, as is already observed in weak winds and high demand.”

How did we get here?

European gas prices have accelerated since early April when weather conditions unusually cold for the time of year caused Europe’s stored gas to fall below the five-year pre-pandemic average, suggesting a potential supply shortage.

Since then, Europe has struggled to get the gas supplies it needs for the winter period back to where they should be. An economic recovery as countries eased Covid-19 restrictions also coincided with unexpectedly high demand, which led to gas shortages.

An exit filter system for a gas processing plant in the Slavyanskaya compressor station (operated by Gazprom), the starting point of the Nord Stream 2 offshore natural gas pipeline. According to Russia’s Deputy Prime Minister Alexander Novak, the construction of Nord Stream 2 should be completed this year.

Peter Kovalev | TASS | Getty Images

In addition, Russia has been shown to be slowing its supply of natural gas to the region, which begs the question of whether this is possibly a deliberate move to bolster its case for starting gas flows via Nord Stream 2. The controversial pipeline carrying natural gas to Europe from Russia, bypassing Ukraine and Poland, is expected to be fully operational soon, solving some of the region’s supply problems.

This deficit “is making the market nervous as we near winter,” Stefan Konstantinov, senior analyst at ICIS Energy, a commodity intelligence service, told CNBC. “In addition, there is the very strong competition for LNG deliveries from Asia and South America, which is driving up gas prices.”

Worries about the climate crisis

Earlier this month, soaring gas prices and low wind power caused the UK to start an old coal-fired power station to meet its electricity needs.

The move raises serious questions about the government’s environmental commitments amid the climate crisis. Coal is the most CO2-intensive fossil fuel in terms of emissions and therefore the most important replacement target in the proposed move to renewable alternatives.

When asked how the UK’s decision to turn to coal could be reconciled with the urgent need to drastically reduce fossil fuel consumption, Konstantinov replied, “It’s a bit ironic, isn’t it?”

Activists march with flags and placards during the march at Extinction Rebellion’s Nature protest in central London about how nature is in crisis.

Loredana Sangiuliano | SOPA pictures | LightRakete | Getty Images

“If there was enough wind, on a day with relatively little electricity it could possibly meet more than half or two-thirds of UK electricity needs. But instead we see that we actually have no wind and are forced to.” fuel environmentally harmful coal-fired power plants. “

“At first glance, this does not match the government’s ambitions for decarbonization. However, this is largely driven by the intermittent nature of renewables: both wind and solar, ”he added.

The UK has pledged to phase out coal-fired power entirely by October 2024 to reduce CO2 emissions.

“The fundamental drivers, ie high gas prices and high CO2 prices, we at ICIS believe that they will remain in the coming months,” said Konstantinov.

Analysts at Wood Mackenzie, a global natural resources consultancy, also expect UK and European gas prices to “stay at current levels through the winter”.

“A recovery in UK gas production is vital this winter,” they added. “And in the future, investments in domestic gas supply will continue to be of crucial importance in order to ensure a smooth energy transition to renewable energies and new technologies.”