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

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

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

Ying Tang | NurPhoto | Getty Images

LONDON-European electricity prices have risen to multi-year highs on a coincidence of factors in recent weeks, ranging from extremely strong raw materials and carbon prices to low wind production.

Moreover, the record run in energy prices is not expected to end soon, with energy analysts warning that market nervousness is likely to continue throughout the winter.

The gas price in October at the Dutch TTF hub, a European benchmark, was seen to rise to a record high of 79 euros ($ 93.31) a megawatt hour on Wednesday. According to Reuters, the contract has risen more than 250% since January, 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 risen high amid the country’s heavy reliance on gas and renewable energy sources to produce electricity.

UK daily electricity prices rose almost 19% to 475 pounds ($ 656.5) on Wednesday, Reuters reported. The contract was already trading near record highs shortly after a fire at a power link between Britain and France cut off electricity imports to Britain.

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

Higher gas prices have also been a “major driver” for raising coal and coal prices to record highs, Rickson said, although he noted that there are other supporting factors at play, such as low wind production and inaccessible nuclear power plants across the continent.

Carbon prices in Europe have almost tripled this year as the EU reduces the supply of emission credits. The EU’s benchmark carbon price has risen for the first time ever in recent weeks above 60 euros per tonne. Ton and traded slightly below this threshold Thursday.

The EU Emissions Trading Scheme is the world’s largest CO2 trading program, covering around 40% of the block’s greenhouse gas emissions and charging emitters for every tonne of carbon dioxide they emit. Record carbon prices have made highly polluting energy sources even less attractive because coal e.g. Emits more carbon dioxide when burned.

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

How did we get here?

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

Europe has since struggled to bring gas supplies needed for the winter period back to where they should be. An economic rebound as countries eased restrictions on Covid-19 also coincided with higher-than-expected demand, leading to gas shortages.

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

Peter Kovalev | TASS | Getty Images

In addition, it has been seen that Russia is slowing down its supply of natural gas by pipeline to the region and raises the question of whether this could be a deliberate step to strengthen its case of starting flows via Nord Stream 2. The controversial pipeline that brings natural gas to Europe from Russia, which bypasses Ukraine and Poland, is soon expected to 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, senior analyst at ICIS Energy, a commodity intelligence service, told CNBC. “It is combined with the very significant competition for LNG supplies from Asia and South America that is driving up gas prices.”

The climate crisis is worrying

Earlier this month, sky-high gas prices and low wind production caused Britain to fire up an old coal-fired power plant to meet its electricity needs.

This move raises serious questions about the government’s environmental commitments in the midst of the climate crisis. To be safe, coal is the most carbon-intensive fossil fuel in terms of emissions and therefore the main target for replacement at the proposed hub for renewable alternatives.

Asked how Britain’s decision to turn to coal could possibly be equated with the urgent need to dramatically reduce fossil fuel use, Konstantinov replied: “That’s a bit ironic, isn’t it?”

Activists march with flags and posters during the march at the Extinction Rebellion’s Nature Protest held in central London on how nature is in crisis.

Loredana Sangiuliano | SOPA images | LightRocket | Getty Images

“If there was enough wind, it could perhaps meet more than half or two-thirds of British electricity demand on a relatively low power demand day. But instead, we see that we actually have no wind and we are forced to fire up polluting coal-fired generation up . “

“At first glance, this is not in line with the government’s ambition to exhibit carbon. But it is largely driven by the intermittent nature of renewable energy: both wind and solar,” he added.

The UK has committed to completely phasing out coal power by October 2024 to reduce CO2 emissions.

“The basic drivers, that is, high gas prices and high carbon prices, we at ICIS believe they are here to stay in the coming months,” Konstantinov said.

Analysts at Wood Mackenzie, a global advisory firm on natural resources, also expect UK and European gas prices to “remain elevated at current levels throughout the winter.”

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

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