What factors are shaping the development of energy prices this summer? The stock market interplay between psychologically driven and fundamentally based energy prices remains a major challenge. Unplanned events such as extreme weather or geopolitical tensions go beyond any fundamental analysis and lead to highly volatile price spikes. This is why part of the crystal ball is always hidden from us, but we can use all our expertise to recognize medium to long-term developments. The fundamentals point to prices for power and gas in most European countries being lower this summer 2024 than in 2023. The moderate increase in consumption in Europe is expected to be bullish, but this will be more than offset by the continued growth in renewable energies. Only in Poland is the increase in consumption likely to be greater than the expansion of renewables. The expansion of renewables is therefore exceeding the slow growth in demand following the pandemic and inflation, which is depressing prices according to classic market logic.
The main indication of the expected summer prices comes from the current gas and CO2 futures contracts. As the last merit order power plant resource, the gas price will dominate pricing on the power market in the coming months. One year ago in Q2 2023, Germany phased out nuclear energy. In combination with the low availability of French nuclear power plants, this will lead to additional shortages on the power market in the long term if renewables are not producing. Reuters analysts are assuming a bearish assessment of the gas market this summer. According to their analysis, the fall in gas prices will lead to a decline in the fuel and CO2 complex, as EUA prices correlate strongly with gas. The fall in TTF gas prices since November last year has significantly reduced the cost of generating power with gas. In recent months, CO2 prices have tracked TTF gas prices, as it is assumed that lower gas prices should encourage the switch from coal to gas and thus lead to lower emissions. Given the close causal link between gas and CO2, Reuters surmises that a further fall in gas prices this summer will be followed by lower CO2 prices. We support this line of reasoning and expect power prices to fall this summer. Nevertheless, in addition to the above-mentioned link to gas prices, there are also two bullish points to consider: Firstly, the substantial short positions in the CO2 market, which will have to be closed again sooner or later, which in turn means additional demand in the market and drives prices upwards. Secondly, according to scientific studies and EU opinion, the current CO2 price is not sufficient to achieve the ambitious decarbonization targets.
The reduction in demand caused by extremely high prices in recent years is also factored into price expectations. After adjusting the actual demand for the temperature effect, we have seen strong deviations from the normal values before the crisis throughout Europe. Last year, the drop in consumption was up to -16% in Germany and at least -7% in France and the UK market. This winter, demand has recovered slightly. This may be due to a partial recovery and/or greater electrification. The reduced demand forecast has been taken into account for the summer of 2024 and the data points to more optimistic growth in Germany and the UK, driven by electrification, while France shows no signs of a recovery in consumption.
Price trends: Power and gas prices fell continuously in 2023 and at the start of 2024. Europe’s energy shortage in the wake of the Ukraine crisis has disappeared. On the contrary, renewables have produced so much power that gas could be stored instead of consumed in many hours. After a mild winter, the storage facilities are around 60% full and the injection period began at the start of April. We are also starting the winter with full storage facilities this year, which will also ease the supply situation for the coming heating season. A good gas supply situation ensured that the downward trend continued until the end of February. The long-term downward trend reversed in March, and the low price level led to some CO2 short positions being filled. Since then, there has been a trend reversal in the sense of an upward movement, which has been stronger in power than in gas. In our view, it was driven by geopolitics and psychology rather than fundamental analysis.
The energy crisis resulting from the Russian attack on Ukraine has led to a continuing boom in PV supply. PV generation in the Big6 countries of Europe (DE, UK, FR, PL, SP, IT) is expected to increase by a total of +16 TWh (or: 14%) this summer. A forecast for the increase in wind energy shows an increase of +26 TWh (or: +20%) in an average weather scenario, whereby the forecast values for wind power in the weather scenarios fluctuate significantly more than the solar power yield forecast. The strong percentage increase in the summer comparison is also due to the rather low wind speeds last summer (in GB and ESP). The expected additional consumption of the Big6 countries amounts to 16 TWh and could therefore be covered by the 16 TWh solar surplus alone, which would mean a declining development of the residual load for the Big6 compared to the summer. The residual demand would be reduced by a total of 26 TWh (minus 4% Y-o-Y), the renewables would overcompensate for the increasing hunger for energy – with exciting consequences for the formation of power prices.
This is because the massive expansion will lead to significantly more hours with low or even negative spot prices. As a result, PV systems are not only cannibalizing their own revenue, they are also leading to the systematic shutdown of run-of-river power plants, for example. The extremely low prices also express an unpleasant detail of the fundamental situation: We have too much power generation, especially in the middle of the day. Now either generation can react by switching off or the consumption side can adapt to the new situation. We then lack additional, flexible consumption units – preferably ones that drive decarbonization in other sectors: E-cars, battery storage, Power2Heat systems, electrolyzers and heat pumps. And the current price situation should also provide the right incentive for this, as there is currently a lot of free energy available. However, similar to the construction of wind power plants or the development of new natural gas fields, the construction of consumption-side plants with technical planning, authorizations and the financing of such assets takes time and lead time.
Ultimately, it currently boils down to a race between the expansion of further renewable generation plants and the expansion of new consumption units. We have a favourite, at least for the next round (i.e. next year): If as much PV is installed again this year, we believe it is unlikely that we will see fewer zero hours next spring than this year. But that can certainly be seen as a positive: In the past, using power for sector coupling with the previously mentioned systems (heat pumps, e-cars, etc.) was very expensive. With the increase in cheap power hours, investments in these assets, which are important for decarbonization, are becoming increasingly profitable.
We expect prices to be low this summer in purely analytical terms, although significant price reductions are unlikely, as the geopolitical threat situation is too risky and pricing is largely psychological in nature. We hope that this outlook on ‘summer prices’ will help you in your decision-making.
What factors are shaping the development of energy prices this summer? The stock market interplay between psychologically driven and fundamentally based energy prices remains a major challenge. Unplanned events such as extreme weather or geopolitical tensions go beyond any fundamental analysis and lead to highly volatile price spikes. This is why part of the crystal ball is always hidden from us, but we can use all our expertise to recognize medium to long-term developments. The fundamentals point to prices for power and gas in most European countries being lower this summer 2024 than in 2023. The moderate increase in consumption in Europe is expected to be bullish, but this will be more than offset by the continued growth in renewable energies. Only in Poland is the increase in consumption likely to be greater than the expansion of renewables. The expansion of renewables is therefore exceeding the slow growth in demand following the pandemic and inflation, which is depressing prices according to classic market logic.
The main indication of the expected summer prices comes from the current gas and CO2 futures contracts. As the last merit order power plant resource, the gas price will dominate pricing on the power market in the coming months. One year ago in Q2 2023, Germany phased out nuclear energy. In combination with the low availability of French nuclear power plants, this will lead to additional shortages on the power market in the long term if renewables are not producing. Reuters analysts are assuming a bearish assessment of the gas market this summer. According to their analysis, the fall in gas prices will lead to a decline in the fuel and CO2 complex, as EUA prices correlate strongly with gas. The fall in TTF gas prices since November last year has significantly reduced the cost of generating power with gas. In recent months, CO2 prices have tracked TTF gas prices, as it is assumed that lower gas prices should encourage the switch from coal to gas and thus lead to lower emissions. Given the close causal link between gas and CO2, Reuters surmises that a further fall in gas prices this summer will be followed by lower CO2 prices. We support this line of reasoning and expect power prices to fall this summer. Nevertheless, in addition to the above-mentioned link to gas prices, there are also two bullish points to consider: Firstly, the substantial short positions in the CO2 market, which will have to be closed again sooner or later, which in turn means additional demand in the market and drives prices upwards. Secondly, according to scientific studies and EU opinion, the current CO2 price is not sufficient to achieve the ambitious decarbonization targets.
The reduction in demand caused by extremely high prices in recent years is also factored into price expectations. After adjusting the actual demand for the temperature effect, we have seen strong deviations from the normal values before the crisis throughout Europe. Last year, the drop in consumption was up to -16% in Germany and at least -7% in France and the UK market. This winter, demand has recovered slightly. This may be due to a partial recovery and/or greater electrification. The reduced demand forecast has been taken into account for the summer of 2024 and the data points to more optimistic growth in Germany and the UK, driven by electrification, while France shows no signs of a recovery in consumption.
Price trends: Power and gas prices fell continuously in 2023 and at the start of 2024. Europe’s energy shortage in the wake of the Ukraine crisis has disappeared. On the contrary, renewables have produced so much power that gas could be stored instead of consumed in many hours. After a mild winter, the storage facilities are around 60% full and the injection period began at the start of April. We are also starting the winter with full storage facilities this year, which will also ease the supply situation for the coming heating season. A good gas supply situation ensured that the downward trend continued until the end of February. The long-term downward trend reversed in March, and the low price level led to some CO2 short positions being filled. Since then, there has been a trend reversal in the sense of an upward movement, which has been stronger in power than in gas. In our view, it was driven by geopolitics and psychology rather than fundamental analysis.
The energy crisis resulting from the Russian attack on Ukraine has led to a continuing boom in PV supply. PV generation in the Big6 countries of Europe (DE, UK, FR, PL, SP, IT) is expected to increase by a total of +16 TWh (or: 14%) this summer. A forecast for the increase in wind energy shows an increase of +26 TWh (or: +20%) in an average weather scenario, whereby the forecast values for wind power in the weather scenarios fluctuate significantly more than the solar power yield forecast. The strong percentage increase in the summer comparison is also due to the rather low wind speeds last summer (in GB and ESP). The expected additional consumption of the Big6 countries amounts to 16 TWh and could therefore be covered by the 16 TWh solar surplus alone, which would mean a declining development of the residual load for the Big6 compared to the summer. The residual demand would be reduced by a total of 26 TWh (minus 4% Y-o-Y), the renewables would overcompensate for the increasing hunger for energy – with exciting consequences for the formation of power prices.
This is because the massive expansion will lead to significantly more hours with low or even negative spot prices. As a result, PV systems are not only cannibalizing their own revenue, they are also leading to the systematic shutdown of run-of-river power plants, for example. The extremely low prices also express an unpleasant detail of the fundamental situation: We have too much power generation, especially in the middle of the day. Now either generation can react by switching off or the consumption side can adapt to the new situation. We then lack additional, flexible consumption units – preferably ones that drive decarbonization in other sectors: E-cars, battery storage, Power2Heat systems, electrolyzers and heat pumps. And the current price situation should also provide the right incentive for this, as there is currently a lot of free energy available. However, similar to the construction of wind power plants or the development of new natural gas fields, the construction of consumption-side plants with technical planning, authorizations and the financing of such assets takes time and lead time.
Ultimately, it currently boils down to a race between the expansion of further renewable generation plants and the expansion of new consumption units. We have a favourite, at least for the next round (i.e. next year): If as much PV is installed again this year, we believe it is unlikely that we will see fewer zero hours next spring than this year. But that can certainly be seen as a positive: In the past, using power for sector coupling with the previously mentioned systems (heat pumps, e-cars, etc.) was very expensive. With the increase in cheap power hours, investments in these assets, which are important for decarbonization, are becoming increasingly profitable.
We expect prices to be low this summer in purely analytical terms, although significant price reductions are unlikely, as the geopolitical threat situation is too risky and pricing is largely psychological in nature. We hope that this outlook on ‘summer prices’ will help you in your decision-making.
Ihr Felix Diwok, CEO
Für das Team der Inercomp