European countries overcome new barriers in spot and futures markets

European countries are on track to break July’s record as the most expensive month on record for energy, with just one week remaining in the month.

The new normal of records being broken on an hourly and daily basis is due to soaring gas prices and the reduction in energy from renewables and nuclear.

If the current trend continues, electricity prices in winter will be penalizing for European consumers, large and small.

Another record week in European electricity markets, with spot and futures prices reaching new highs, again driven primarily by the gas market, in addition to other fundamental supply drivers in nuclear, coal, hydro and other renewables.

As noted in last week’s note, August is on course to be the new record high for most European markets, a picture that has only grown stronger over the past week.

This is the case of Italy, France, Germany, the United Kingdom and certain regions of the Nordic countries.

For the first time ever, a major European market could end up with a monthly average spot price above €500, with Italy averaging €504 so far this month.

As expected, week 34 also broke the weekly record for several markets, with Italy in the lead again reaching €506 for the week.

The gap between the different markets has narrowed considerably, with France and Germany being very close to Italian prices, reaching €486 and €481 for the week, respectively.

Prices continued to rise at the start of week 34, and for the first time since early April, with the UK and France both averaging above €600 per MWh so far this week, even more than ‘in Italy.

Consequently, the weekly and monthly record should be broken for most countries, which does not bode well for the coming winter.

The movement in the futures market was also very strong, with new highs in both short and long-term contracts, mainly caused by the gas market.

Since gas is the marginal producer of electricity in many countries for many hours of the day, electricity and gas contracts are generally highly correlated.

This has also been the case in recent weeks, with very volatile gas prices, but with a similar movement in the electricity market.

Most power contracts hit a new all-time high on August 22, when Germany’s first month topped €600 for the first time, closing at €613 per MWh.

Even higher prices were reached in France, where the first month closed at €690 on the same day.

It doesn’t look much better further down the road as prior year contracts also hit new highs, with Germany closing at €645 and France €840 on Mondays.

There was a similar increase in year-round gas contracts, but also short-term futures and spot contracts, gas prices reached new highs and were the main driver of record high prices. electricity.

The TTF day-ahead spot contract broke its all-time high on Monday, closing at €272 per MWh.

The first month TTF was slightly higher, closing at €278 on the same day.

The reasons for the big increase were another update on the European supply situation, as a sudden maintenance on Nord Steam 1 for late August was announced, shutting down streams completely for three days.

Market participants fear that flows will not return at all after that, adding upward pressure on prices for market participants to secure their gas supply.

On the positive side, storage injection levels remained healthy and overall European storage stood at 77.42% as of August 21, approaching the EU target of 80% as of November 1.

Other drivers of exceptionally high spot and forward electricity prices have been the lack of nuclear and hydropower, which impacts total European supply throughout the year.

Additionally, coal continues to trade at very high levels, with European benchmark prices once again approaching $400 a tonne.

The first-month API2 CIF ARA contract is now trading at $398 per ton, the highest level since March.

Even with this price of coal, it is still a much cheaper source of power generation than gas, with current fuel prices.

Carbon prices also hit a new all-time high last week, hitting €98 a tonne at the August 19 close.

Since then, prices have come down a lot, trading at €90.8 per tonne at the time of writing.

There have been mixed drivers for the carbon move lately, with extremely high dark spreads supporting the upside move, but on the other hand fears that the economic downturn is a bearish factor.

The European Commission has approved a massive German aid package of 27.5 billion euros to compensate energy-intensive companies.

The now approved measure will cover part of the increase in electricity prices resulting from the impact of carbon prices on electricity production costs over the period 2021-2030.

The aim is to prevent so-called ‘carbon leakage’, where companies relocate production outside the EU, to countries with less ambitious climate policies.

The Nordic TSOs urge Norway not to adopt measures to limit electricity exports to neighboring countries, as stated in a joint response from Energinet, Svenska Kraftnat and Fingrid.

Norwegian TSO Statnett and utility Statkraft expressed similar concerns to policymakers.

The government has not identified criteria for a possible export ban and is awaiting advice from the regulator, RME. Fabian Ronningen

North America

Average electricity prices have started to ease off the summer highs in the US, averaging $86 per MWh. However, daily minimum electricity prices are at an all-time high.

Last week, average daily minimum electricity spot prices rarely fell below $50 per MWh, compared to May when the average minimum was around $27 per MWh.

July had the highest average electricity prices of the summer at around $92 per MWh, but the average low for the same period was $42 per MWh.

Higher daily minimum prices are a direct result of some of the highest ever U.S. coal and gas prices

Henry Hub natural gas spot prices last week were the highest since before the Covid pandemic.

Spot coal prices generally rose to record highs last week as well.

The average price of Henry Hub natural gas reached over $9 per million British thermal units.

Although electricity demand declines in coordination with national temperatures, higher generation costs drive up minimum generation costs. James Ryan Kronk

Fabian Rønningen and James Ryan Kronk are analysts at Rystad Energy