Market commentary

October 2023

Europe was lucky in the previous year when it came to energy prices. After a year of extreme gas and power prices on the spot market, the price explosion expected in the summer of 2022 did not occur in 2023. Since the beginning of the year, power and gas prices have fallen steadily and they are now at two to three times their pre-war levels.

The summer now coming to an end has not increased the energy shortage in Europe. On the contra-ry, renewables have produced so much power that gas could be stored in many hours and was not consumed. In mid-September, the maximum fill level of the European storage facilities of the previ-ous year was exceeded. Therefore, there is still downward pressure on prices and even the substan-tial reduction in Norwegian supply volumes is not helping gas spot prices to rise sharply again.

The business environment remains economically unfavorable. There is weak momentum in the OECD countries and especially in Europe energy consumption remains under pressure. Parts of the energy-intensive industry have disappeared or reduced capacities. Total power and gas consumption is about 5% lower year-on-year.
The war in Ukraine and the altered gas flows remain. It is to be feared that the war will remain hot at least until the US elections in 2024. Even after that, there may be no clarity and energy-poor Europe will remain a pawn in the LNG and oil markets.

Energy austerity efforts will remain in place as long as the price is perceived as “expensive” and as long as the spectra of security of supply looms.
The price of gas will remain dominant for pricing in the power market and for coal demand in Eu-rope in the coming months, despite all the signals of easing. Coal-fired power plants in Europe ran at full load during the winter. Now Germany’s nuclear phase-out happened at the beginning of Q2. 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 do not produce. Gas thus remains the tipping point for power pricing and is currently cheaper than coal-fired generation.

Europe’s competitive disadvantage in energy prices vis-à-vis the USA and also some Asian econo-mies has steadily narrowed. It could quickly widen again if a technical or weather-related extreme event occurs. From our current perspective, the coming winter will probably again be without ener-gy control.

Despite all the unfavorable influences in the short term, we expect the prices for gas and power to be much more favorable in the distant future (adjusted for purchasing power and inflation) than some forecasts show today. The currently high prices influence supply and renewable energies are the most cost-effective and politically stable form of power production. At the same time, the CO2 price at currently approx. 85 EUR/t (Future Cal 24) promotes the move away from coal and gas.

For 2023, however, we only expect more favorable prices at the level of below 90 EUR/MWh for power or below 35 EUR/MWh for gas if the war does not take an extreme turn.
Thus, the European markets will remain the plaything between weather, sanctions, the energy cost equalization regulations and the restrictions caused by the war. And although Ukraine (physically) and EU-Europe (financially) are footing the bill for this conflict, no easy options are visible for Eu-rope. The burden on the Ukrainian people seems inhumane and it is exasperating that Europe does not have a good hand in fighting the injustice caused by Putin.

Europe remains extremely dependent on non-EU supplies: More than 90% of gas comes from non-EU countries, and if we see Norway as a very strong friend, that still leaves more than 60% import dependency. And import dependence means price dependence on the world LNG market. This mar-ket knows no friends, but supply and demand. As long as we remain dependent on global LNG with-out alternatives, we can only influence the pricing of power and gas in Europe through renewables and CO2 trading. In order not to put ourselves in the price OUT in the short term when decarbonizing the energy industry, we will need the CBAM again…