The energy crisis in Europe makes the market nervous before winter

Round bales of straw drying on the ground are seen in front of the power plant operated by RWE AG near Rommerskirchen, Germany on August 10, 2021. The cost of natural gas and electricity has increased across Europe.

Ying Tang | NurPhoto | Getty Images

LONDON – Electricity prices in Europe have hit multi-year highs due to a confluence of factors in recent weeks, ranging from extremely high commodity and carbon prices to low wind output.

What’s more, the record-breaking energy price race is not expected to end anytime soon, with energy analysts warning that market nervousness is likely to persist through the winter.

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

In the UK, where electricity bills are now the most expensive in Europe, electricity prices have skyrocketed amid the country’s heavy dependence on gas and renewables to generate electricity .

UK electricity prices rose nearly 19% to 475 pounds ($ 656.5) on Wednesday, Reuters reported. The contract was already trading at record levels shortly after a fire on an electricity link between the UK and France cut electricity imports into Britain.

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

Rising gas prices have also been a “big driver” in pushing carbon and coal prices up to record levels, Rickson said, although he noted that there are other supporting factors in the pipeline. game, 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 cuts the supply of emissions credits. The EU’s benchmark carbon price exceeded 60 euros per metric tonne for the first time in recent weeks, trading slightly below that threshold on Thursday.

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

Rickson said the outlook for electricity prices in Europe this winter will be “heavily dependent” on gas prices, adding that he expects gas prices to rise even more in the coming months. “Apart from the” average “picture, we would expect prices to be very volatile, with hourly price fluctuations low or even negative when wind production is high, at very high prices as we can already see when the wind is light and demand is high. “

How did we get here?

European gas prices have accelerated since early April, when unusually cold weather for the season caused gas stored in Europe to drop below the five-year average before the pandemic, indicating a potential supply shortage. .

Europe has since struggled to bring the necessary winter gas supplies back to where they should be. An economic rebound as countries ease restrictions on Covid-19 also coincided with higher than expected demand which resulted in a gas shortage.

A filtration installation at the outlet of a gas treatment unit at the Slavyanskaya compressor station (operated by Gazprom), the starting point of the Nord Stream 2 offshore gas pipeline. According to Russian Deputy Prime Minister Alexander Novak, the construction of Nord Stream 2 will be completed by the end of this year.

Pierre Kovalev | TASS | Getty Images

Additionally, Russia has slowed down its pipeline delivery of natural gas to the region, raising questions as to whether this is a deliberate move to strengthen its case for starting flows through Nord Stream 2. The controversial pipeline, bringing natural gas to Europe from Russia, bypassing Ukraine and Poland, is expected to be fully operational soon and could solve some of the region’s supply problems.

The deficit “makes the market nervous as winter approaches,” Stefan Konstantinov, senior analyst at ICIS Energy, a commodities intelligence service, told CNBC. “This adds to the very strong competition for LNG supplies from Asia and South America, which is driving up gas prices.”

Concerns about the climate crisis

Earlier this month, soaring gas prices and low wind generation prompted the UK to start up a former coal-fired power station to meet its electricity needs.

This decision raises serious questions about the government’s environmental commitments in the context of the climate crisis. Certainly, coal is the most carbon-intensive fossil fuel in terms of emissions and therefore the most important replacement target in the proposed pivot towards renewable alternatives.

When asked how the UK’s decision to switch to coal might be linked to the urgent need to drastically reduce fossil fuel use, Konstantinov replied: “It’s a bit ironic, no. isn’t it?

Activists march with flags and placards during the Extinction Rebellion anti-nature protest in central London on Crisis of Nature.

Loredana Sangiuliano | SOPA Pictures | LightRocket | Getty Images

“If there was enough wind, it could possibly meet more than half or two-thirds of the UK’s electricity demand on a day of relatively low electricity demand. start polluting coal-fired production. “

“At first glance, this does not correspond to the government’s ambition to decarbonize. But this is very strongly motivated by the intermittent nature of renewable energies: wind and solar, ”he added.

The UK has pledged to phase out coal power altogether by October 2024 to cut carbon emissions.

“The fundamental drivers, namely high gas prices and high carbon prices, we believe at ICIS are here to stay in the months to come,” 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.”

“A resumption of gas production in the UK is critical for this winter,” they added. “And in the future, investments in domestic gas supply remain crucial to ensure a smooth energy transition to renewables and new technologies.”

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