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Europe’s energy crisis is making the market nervous ahead of winter


Round bales of straw drying on the field are seen in front of the power station operated by RWE AG near Rommerskirchen, Germany on August 10, 2021. Europe has seen a dramatic rise in the cost of electricity and natural gas.

Ying Tang | NurPhoto | Getty Images

LONDON — European power prices have spiraled to multi-year highs on a confluence of factors in recent weeks, ranging from extremely strong commodity and carbon prices to low wind output.

The record-breaking run in energy prices will not end soon. Energy analysts warn that market anxiety is likely to continue throughout winter.

On Wednesday, the October gas price for TTF Hub in Dutch, which is a European benchmark, reached a new record of 79 euro ($93.31 per megawatt-hour). According to Reuters the contract rose more than 250% in January while comparable power contracts have doubled in France and Germany.

The U.K. has seen its electricity prices rise due to high dependence on electricity from renewable sources and fossil fuels.

Reuters reports that the British day-ahead electricity price rose almost 19% to 475 Pounds ($656.5) Wednesday. Shortly after an explosion at the U.K./France power line cut off electricity imports from Britain, the contract traded near records.

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

Rickson stated that higher gas prices are also a major driver in pushing carbon and coal prices up to new records, but he acknowledged there were other factors, including low wind generation, and unavailability of nuclear plants across Europe.

As the European Union cuts its supply of carbon credits, the European Union has seen the prices for carbon in Europe nearly double this year. In recent weeks the EU’s benchmark carbon prices jumped above 60 euro per metric ton. On Thursday, they traded just below that threshold.

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 carbon dioxide they emit. Due to the fact that coal emits much more carbon dioxide than other sources of electricity, record-breaking carbon prices make them less attractive.

Rickson stated that the European power price outlook this winter is “highly dependent on” gas prices. He also said that gas prices will rise further over the next few months. We expect high volatility, with prices swinging from very low prices (or even negative) when winds are high to extremely high prices, as we have seen in the past when demand is high and wind is low.

Were we lucky?

Since April began, European gas prices increased. This was due to an increase in European gas prices. Europe’s storage of gas fell below its five-year-old average.

Europe has been struggling to restore winter gas supplies to their normal levels. A rebound in economic activity as Covid-19 restrictions were relaxed by countries also led to higher than expected demand, which caused a shortfall of gas.

The Nord Stream 2 off-shore natural gas pipeline will start from the Slavyanskaya compressor plant (operated Gazprom). This facility is used for output filtration. Alexander Novak (Russia’s Deputy Prime Minister) stated that Nord Stream 2 construction will be complete by the end this year.

TASS – Getty Images Russia was also seen to, raising doubts about Russia’s motive for Nord Stream 2 to be completed by the end of this year.| TASS | Getty Images

Further to this, Russia has been seen to slow its delivery of piped natural gas to the region, raising questions about whether this may be a deliberate move to bolster its case for starting flows via Nord Stream 2. The controversial pipeline, bringing natural gas to Europe from Russia, bypassing Ukraine and Poland, is soon expected to be fully operational and could resolve some of the region’s supply problems.

CNBC’s Stefan Konstantinov said that this deficit “is making the market nervous” as winter approaches. He is a senior analyst with ICIS Energy. Gas prices are rising due to the intense competition from South America for LNG supplies.

Climate crisis concerns

Earlier this month, soaring gas prices and low wind output prompted the U.K. to fire up an old coal power plant to meet its electricity needs.

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

Konstantinov was asked about the U.K.’s decision to switch to coal and how it could be reconciled with the need to drastically scale down fossil fuel usage. He replied, “It’s quite ironic.

Extinction Rebellion’s Nature Protest was held in Central London. Activists marched with placards and flags during the event.

Loredana Sangiuliano – SOPA Images | SOPA Images | LightRocket | Getty Images

“If there was enough wind, it could maybe meet more than half or two-thirds of U.K. power demand on a relatively low power demand day. We are instead seeing that there is no wind, and so are being forced to use the polluting co-fired energy.

At first glance this doesn’t align with government’s goal to decarbonize. However, this can be explained by both the intermittent nature and flexibility of renewables such as solar or wind.

The U.K. has committed to phasing out coal power completely by Oct. 2024 to cut carbon emissions.

The fundamental drivers of carbon emissions, i.e. Konstantinov stated that high gas prices as well as high carbon prices are the fundamental drivers of economic growth.

Analysts at Wood Mackenzie, a global natural resources consultancy, also expect U.K. and European gas prices “to remain elevated at current levels throughout winter.”

The analysts added, “An increase in UK gas production will be critical this winter.” Investment in domestic gas supplies is crucial for ensuring a smooth transition to new technologies and renewables.