Drought is driving European energy markets towards disaster

Energy markets and nature seem to have a grudge against Europe. Record gas prices, rising coal prices and droughts interfering with power generation in some key markets have combined to push power contracts across the EU to record highs amid uncertainty about the coming winter is getting worse.

Reuters reported earlier this week, a number of energy futures contracts traded in the EU hit highs due to what is increasingly looking like a perfect energy storm, affecting all energy sources in a one way or another.

“Several factors add up: the market is not certain that EDF will sufficiently increase the availability of nuclear power for the winter, which explains the price differences between the two countries. [France and Germany]”, Fabian Ronningen, an analyst at Rystad Energy, told Reuters.

EDF had to significantly reduce the capacity utilization rate of its nuclear power plants because the droughts in France reduced the availability of water for cooling the reactors. But the drought added to previous problems: the corrosion of the reactors which guest the utility to close some of them earlier this year, thereby reducing the supply of electricity available for sale on the national or regional market.

Meanwhile, in Germany, wind generation is low, as is the water level of the Rhine, a key transport route for things like coal, for example. The German economy is very dependent on this crucial maritime transport corridorbut when the water level is extremely low, shippers simply cannot load the usual volume of cargo, which means that coal and other cargo arrives at its destination in smaller quantities and more slowly.

The drought is also affecting hydropower generation, adding to concerns about future supply. Due to the drought, Norway, which generates more than two-thirds of its electricity from hydroelectricity, announcement this would curb electricity exports, threatening supplies to other European countries at the worst possible time. In the UK there are talk on power outages.

Meanwhile, gas flows from Gazprom to Europe remain far below normal, the Russian major Attention this week that gas prices on the European spot market could exceed $4,000 per 1,000 cubic meters. Recently, spot prices broke through the $2,500 mark.

“Spot gas prices in Europe have reached $2,500 (per 1,000 cubic meters). Conservative estimates suggest that if such a trend continues, prices will exceed $4,000 per 1,000 cubic meters this winter,” Gazprom said. . said.

The European Union was quick to switch from Russian gas to US LNG amid the Ukraine crisis, but the speed was not enough: US LNG export capacity is not unlimited, and producers have also other customers, in Asia. As the winter season approaches, Asian buyers are increasingly willing to pay high premiums for any LNG, which has intensified competition for a limited number of LNG carriers.

It is therefore not surprising that electricity prices in parts of Europe have reached record highs. Even less wonder that industries are starting to collapse, according to a recent Bloomberg report. The report notes that Germany’s one-year electricity contract rose to more than 530 euros per MWh earlier this week, representing a 500% increase over the past 12 months. No industry can absorb such a price shock unscathed, and German industry did not.

Germany had to pay the equivalent of more than $15 billion to bail out one of its biggest gas utilities, Uniper, earlier this year. Chemicals giant BASF has warned that a gas shortage could wreak havoc on the industry. Aluminum and zinc smelters are closing, as are fertilizer plants, all because of record gas and electricity prices.

Relief is not in sight unless one considers the filling of gas storage caverns in Europe as a form of relief. The EC had set a target of 80% for storage fill rates by 1 October. Member States are on track to reach this target ahead of schedule, but this comes at a cost: the EU gas bill this year is ten times higher than it normally is, to more than $51 billion.

Moreover, storage alone will not be enough to sustain European economies during the winter months. The EU will need more gas as a regular supply. Besides the United States, there are few other places he can get it. Perhaps that’s why the head of Germany’s energy regulator has warned that the EU’s biggest economy should cut its gas consumption by a fifth to avoid shortages and rationing in winter.

“The longer these price increases last, the more this will be felt across the economy,” Daniel Kral, senior economist at Oxford Economics, told Bloomberg this week. “The scale of the increase and the scale of the crisis is unlike anything in the past decades.”

It is unfortunate that Europe is experiencing one unprecedented crisis after another. And it could get even worse when the oil embargo against Russia comes into force at the end of the year.

Analysts have warned that this could lead to higher oil prices. This, in turn, will add upward pressure on electricity prices due to the switch from gas to oil that some utilities in Europe have implemented to protect themselves from prohibitive gas prices.

By Irina Slav for Oilprice.com

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