Europe power prices hit new high in wake of Russian gas supply cuts

Prices quadruple in a year exacerbated by Norwegian oilfield strikes and maintenance problems at French nuclear plants

European electricity prices have reached the highest sustained level on record, as Russia’s cuts to the continent’s gas supplies ripple through energy networks and threaten to cause lasting pain for industry and households.

German baseload power for delivery next year, the benchmark European price, hit its highest-ever level on Monday and surpassed the previous record set in December after gaining 13 per cent to trade at €325 per megawatt hour. The equivalent contract in France has doubled to €366 per megawatt hour since the start of the year.

Power prices are heavily influenced by the cost of gas, which is used to generate electricity. In Europe, gas prices have rallied to their highest level in four months and have more than quadrupled since a year ago after Moscow deepened gas supply cuts to Europe.

A shutdown by Norway’s Equinor of three oil and gasfields after workers went on strike on Monday put the European gas market under additional pressure as nations race to build storage ahead of winter.

The strikes will affect the collective 89,000 barrels of oil equivalent a day production at Gudrun, Oseberg South and Oseberg East, which includes 27,500 barrel of oil equivalent (boe) per day of gas, and the trade union is threatening more disruptive action in the coming days, disrupting an additional 333,000 boe per day, of which 264,000 boe per day is natural gas.

The disruption comes at a time when the rest of Europe has turned to its traditional second biggest supplier of gas to plug the gap after Moscow cut flows to the continent. European gas prices based on the benchmark front-month futures contract tied to TTF rose 3 per cent on Tuesday to €166 per megawatt hour. That is more than four times of a year ago.

The situation is also being exacerbated by maintenance problems at a large number of France’s nuclear plants. Neighbouring countries are burning additional gas to generate electricity for France at a time when the continent is otherwise trying to conserve supplies for the winter, fearing further cuts to Russian exports.

“It’s not a situation which anyone in Germany had on their charts even a year ago,” said Hanns Koenig, head of commissioned projects at Aurora Energy, a research firm.

Germany exported approximately 600,000 MWh of electricity in June on a net basis to France compared with 300,000 MWh of imports from its neighbour a year earlier, according to data from Germany’s Federal Network Agency. The UK is also exporting the equivalent of as much as 10 per cent of its own domestic electricity demand each day to France.

William Peck, power market analyst at ICIS, a commodity analytics firm, said the higher electricity prices reflected traders increasingly predicting that extremely tight gas supplies would persist for at least another year.

“Gas had underinvestment in new production infrastructure during Covid and demand came back quicker than people expected. Prices started rising a year ago,” he said. “The Russia-Ukraine war turbocharged everything.”

Fears over gas supplies are being stoked by the shutdown of the Nord Stream 1 pipeline between Russia and Germany from July 11th for scheduled maintenance. Moscow claims sanctions have led to a decline in flows since key compressor parts are stuck in Canada, but European politicians see this as a pretext for cutting supplies and worry that flows will not even return to the current capacity of 40 per cent once the pipeline resumes.

Germany has plans for up to 10GW of coal-fired power generation to return, but analysts say record-high coal prices will limit the relief to the power market.

“If those two things weren’t enough, you also have the issue of French nuclear availability which is historically low,” said Mr Koenig.

Last month, Berlin put the second stage of its three-tier emergency plan into place. The third level would require the rationing of gas to industrial users and households. A local government official in Hamburg warned last weekend that hot water rationing might be needed over the winter if the gas shortage becomes acute.

The high power prices are already showing signs of bringing down demand. Mr Peck said German electricity demand was down 5 per cent in the past four months compared with the previous year because of the higher energy costs, which would mainly reflect industrial users curtailing operations.

European zinc and aluminium smelters are under significant pressure from rising energy costs and falling prices. Chris Heron, public affairs director at Eurometaux, the European metals association, said the sector has “been on its knees” since last September and “further plant closures are a real concern if power prices stay so high”. - Copyright The Financial Times Limited 2022