Don’t be fooled by Europe’s energy price slump
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After reaching unprecedented highs last summer, energy prices in Europe are now back to pre-war levels for gas and even entered negative territory in some places for electricity. But don’t be fooled, this is just a slump in what will likely become a seasonal roller coaster ride.
At first glance, it would be tempting to conclude that Europe’s energy crisis has taken a decisive turn for the better.
After hitting a historical high in August last year, day-ahead prices on the EU’s wholesale electricity market have entered negative territory in Finland over the past weeks and have reached new lows in other countries due to warm and sunny weather.
In Belgium, for instance, wind and solar generated enough electricity to cover the country’s entire demand for the first time last week. Power generation was so high that Belgian authorities even had to curtail wind production and pay large industrial electricity consumers to increase their consumption to absorb the excess production.
In gas markets, the situation is almost as spectacular. In January, prices had returned to levels not seen since June 2021 – the year preceding Russia’s war on Ukraine – due mainly to an unusually warm winter and demand destruction among industrial consumers.
The trend continued in June, with gas futures in Europe going below €24 per megawatt hour to kick off the month, a fresh two-year low, after a 30% drop in May. This followed a historical peak of over €340/MWh in August last year after Russia nearly stopped all European exports in retaliation for economic sanctions imposed on Moscow for its war of aggression in Ukraine.
So has Europe turned a corner on the energy crisis? Yes and no.
On the bright side, hot and sunny weather has resulted in increased solar power generation – setting records in some countries – while rainy weather in other parts of Europe has resulted in a year-on-year uptick in hydropower generation, explains Sarah Brown, Europe lead at Ember, a climate and energy think-tank.
French nuclear reactors are also finally coming back online after suffering a streak of failures last year or undergoing maintenance work that had been delayed due to the COVID crisis.
“Consequently, we are seeing a significant year-on-year drop in demand for electricity produced by fossil fuels, which was unprecedentedly expensive last year. This has been combined with a low power demand period and a glut in the fossil gas market,” she told EURACTIV.
Policies implemented at the EU level have also helped, the European Commission pointed out in a document outlining progress made since the EU executive tabled its REPowerEU plan one year ago, aimed at ditching Russian gas.
Concerns about a winter energy shortage receded as Europe started diversifying gas supplies and pushed through emergency measures, such as a 90% gas storage target ahead of the winter heating season and a demand reduction target of 5% for electricity during peak hours.
Price swings to become the norm
Looking to next winter, Europe is also in a better position, with gas storage levels reaching 60% on average compared to last year’s average of around 30%, says Kristian Ruby, secretary general of Eurelectric, the EU’s power industry association.
Yet, Europe is far from being done with energy price swings. In fact, wide seasonal price fluctuations are expected to become the norm as Europe moves ahead with increased shares of renewable electricity, experts say.
“What we experience now is what we can expect to happen frequently in a highly renewable-powered system,” Ruby told EURACTIV. “When weather conditions are right, there will be a strong downward pressure on prices,” he remarked, saying high precipitation in Finland, for instance, heavily impacted the country’s hydropower capacity and contributed to the downward pressure on prices.
“It is too early to relax,” Ruby warned. “We could have a cold winter and bad weather conditions, which could drive up prices again,” he cautioned, saying the EU’s future energy system “will need much more storage capacity across technologies and timeframes” to match supply and demand on a seasonal basis.
Georg Zachmann, from the Bruegel economic think-tank in Brussels, agrees that Europe is in a better position than last year, saying increased amounts of nuclear and solar power draw a generally positive trend ahead of next winter.
“But the challenge increasingly becomes that Europe’s energy system will be very different in summer and in winter,” he told EURACTIV in a cautionary note.
On gas, Europe’s storage levels were already full in November last year, and there is no additional storage capacity available at the moment, Zachmann points out. In addition, solar generation in January is only about 10-20% of what it is during the summer months, he adds, saying building more PV brings only limited benefit to cover winter demand.
“Hence, summer-winter spreads might become much more pronounced – which will hopefully soon incentivise more structural solutions – such as commercialising seasonal storage or seasonal demand-shifting behaviour,” Zachmann says.
With growing shares of renewables in the electricity mix, tackling seasonal price swings will be a key challenge for Europe, making the issue one of the central policy debates in the ongoing reform of EU electricity market rules.
“These prices show that the market is working,” Ruby says. However, he adds that long-term price signals are also needed because they provide clarity to investors looking to inject money into big energy assets such as offshore wind farms, grid infrastructure, or nuclear plants.
Those investments are essential to the success of the green transition and “should not be deterred by periods of very low prices,” Ruby warns.
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