The European energy sector continues to be shocked by price volatility and uncertainty over energy balances for the coming winter. Power spot prices across Western Europe have climbed to unparalleled levels: daily average prices have traded above €600 ($599) per megawatt-hour (MWh) in Germany and above €700 per MWh in France, with peak-hour spikes as high as €1,500 per MWh. Now there is a risk of even higher prices during the winter months as Russia has halted all gas exports through Nord Stream 1 for an indefinite period. However, the European Commission is still exploring alternatives to limit the impact of extreme prices for end users. Strong volatility in the gas market is the cause of these fluctuations, as some signals switched from bearish to bullish over the weekend. The market is also unsure how to react to the proposed EU market intervention, where one target seems to be capping gas prices and another decoupling the European gas and power markets. Rystad Energy research shows that if gas demand has to be reduced, as seems increasingly likely, Europe will face a series of unenviable options – from cutting power to industry to rolling blackouts for consumers.
Recent price rises have been caused by a perfect storm of lower Russian gas supplies; nuclear outages; and low hydropower generation and coal supply disruptions because of drought. Of these factors, lower gas supplies have the greatest effect because gas continues to be needed in the power mix and is the marginal source of supply and therefore hits prices the most. However, the historically high gas prices have so far not curtailed demand from the power sector significantly – which means tougher measures may be needed. EU member states last month committed to voluntarily reducing their gas demand by 15% from 1 August through March next year in case of supply shortages.
If these 15% demand cuts become mandatory within the EU, an imbalance in power supply and demand could appear as soon as this month and worsen into 2023. The power deficit is estimated to reach a maximum of 13.5 TWh in January before gradually being reduced. A straight 15% gas-for-power demand cut is not the most likely, however, as other sectors such as industry would likely face a higher reduction to shield the power sector to ensure security of supply. A worst-case scenario with very cold weather, low wind generation, and a 15% cut in gas-for-power demand would prove very challenging for the European power system, and could lead to power rationing and blackouts.
Gas continues to be needed in the power mix
European utilities are, despite great efforts, struggling to reduce their dependence on gas – in fact, gas-power generation has climbed as a result of the challenges mentioned above. Nuclear and hydropower generation in the EU have dropped 14% and 25% year-on-year, respectively, erasing 110 terawatt-hours (TWh) of electricity supply from the grid. This has been compensated by higher wind, coal, solar and gas generation. Overall, gas-power generation has grown 6% year-on-year to reach 39.1 TWh in July. Things will get even more challenging towards the end of the year as seasonal electricity demand increases – electricity consumption in December is normally 25% higher than in July, meaning that European consumption could reach more than 280 TWh per month.
The coming winter is certain to be the most challenging Europe has seen in decades – and consumers or governments are expected to pay the price. If gas demand needs to be cut, we expect to see power supply issues emerging this month and worsening into 2023,