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

LONDON – European energy prices have risen to multi-year highs at a confluence of factors in recent weeks, ranging from extremely strong commodity and carbon prices to low wind production.

In addition, the record energy prices are not expected to end soon, as energy analysts warn that market nervousness is likely to persist throughout the winter.

The price of gas in October at the Dutch hub TTF, a European benchmark, was seen to reach a record high of 79 euros ($ 93.31) per megawatt-hour on Wednesday. According to Reuters, the contract has risen more than 250% since January, while benchmark contracts in France and Germany have doubled.

In the UK, where electricity bills are now the most expensive in Europe, energy prices have risen amid the country’s high dependence on gas and renewable energy to generate electricity.

British electricity prices a day in advance rose nearly 19% to reach £ 475 ($ 656.5) on Wednesday, Reuters reported. The contract was already trading near record highs shortly after a fire at an electricity connection between the UK and France cut off electricity imports to Britain.

“By far, the most important factor is gas prices,” Glenn Rickson, head of European energy analysis at S&P Global Platts Analytics, told CNBC by email.

Higher gas prices have also been a “big driver” in raising coal and coal prices to record highs, Rickson said, though he noted there are other supporting factors at stake. , such as low wind generation and the unavailability of nuclear power plants across the continent.

Carbon prices in Europe have almost tripled this year as the European Union reduces its supply of emission credits. The EU benchmark carbon price rose above 60 euros per metric tonne for the first time in recent weeks, and traded slightly below that threshold on Thursday.

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

Rickson said the outlook for European energy prices this winter will depend “heavily” on gas prices, adding that he expects gas prices to rise further in the coming months. “Apart from the ‘average’ picture, we expect prices to be highly volatile, with low or even negative hourly price changes when wind generation is high, to very high prices as already seen when the wind it is low and the demand is high “.

European gas prices have accelerated since early April, when cold and uneven weather conditions meant that Europe’s stored gas fell below the five-year average before the pandemic, indicating a possible supply crisis.

Since then, Europe has struggled to bring the necessary gas supplies for the winter period where they should be. An economic rebound as countries eased Covid-19 restrictions also coincided with higher-than-expected demand that led to gas shortages.

In addition, it has been seen that Russia slows down the delivery of piped natural gas to the region and raises questions about whether it could be a deliberate move to bolster its case to start flows through Nord Stream 2. pipeline, which carries natural gas to Russia is soon expected to bypass Russia and Ukraine and Poland, be fully operational and can solve some of the region’s supply problems.

This deficit “makes the market nervous as we approach winter,” Stefan Konstantinov, a senior analyst at ICIS Energy, a commodity intelligence service, told CNBC. “This joins the very important competition for LNG supplies from Asia and South America, which is driving up gas prices.”

Earlier this month, rising gas prices and low wind production led the UK to launch a former coal-fired power plant to meet its electricity needs.

The measure raises serious questions about the government’s environmental commitments amid the climate crisis. Certainly coal is the most carbon-intensive fossil fuel in terms of emissions and therefore the most important target for the proposed pivot replacement by renewable alternatives.

When asked how the UK’s decision to use coal could be squared with the urgent need to drastically reduce the use of fossil fuels, Konstantinov replied: “It’s a bit ironic, isn’t it?”

“If there was enough wind, it could possibly meet more than half or two-thirds of the UK’s energy demand on a relatively low energy demand day. But instead, what we’re seeing is that it’s actually we have no wind and we are forced to shoot up the generation of polluting coal. “

“At first glance, this does not match the government’s ambition to decarbonise. But this is highly motivated by the intermittent nature of renewable energy: both wind and solar,” he added.

The UK is committed to completely eliminating coal energy in October 2024 to reduce carbon emissions.

“The key drivers, namely high gas prices and high carbon prices, at ICIS we believe are here to stay for the next few months,” Konstantinov said.

Analysts at Wood Mackenzie, a global natural resources consultancy, also expect gas prices in the UK and Europe to “remain high at current levels throughout the winter”.

“The recovery in UK gas production is crucial for this winter,” they added. “And, in the future, investment in domestic gas supply remains crucial to ensure a smooth energy transition to renewable energy and new technologies.”