Market commentary

January 2021

In Europe, the consequences of the 2nd lockdown are being felt in the spot market for electricity and gas. In January, however, the weather influence was dominant and prices rose considerably. The consumption of gas and electricity will also be higher in February than in February 2020, if the weather forecasts are correct. At the same time, the extremely high storage levels of gas (EU-28) from the previous year have fallen dramatically and imports from Russia are also low. This raises price expectations for both gas and electricity for 2021. Hopes of a Corona vaccination have boosted sentiment in the futures market for oil and gas, causing prices to rise, but the reality of the restrictions dampens the mood.

The increase in forward market prices for electricity and gas occurred from a level close to the historic lows for gas and oil. The futures market therefore shows hope for rising prices. At the same time, the price increase of the last two months has been so extreme that many do not believe that this will actually become reality. It remains unclear how long the Corona-induced reduction in consumption will last and when the X. lockdown will come in many countries. This is also reflected in the market price: for gas and in some markets for electricity, the annual forward market prices are in backwardation. In other words, delivery for 2025 is cheaper than for the coming year.

The year 2020 brought new production records for renewable energies (RE) in a lot of areas on the electricity market, because the expansion of RE progressed unhindered. As a result, at the same time as consumption was reduced in large parts of Europe, the share of RE was higher than ever before. Since the majority of RE (wind, PV, hydropower) enters the merit order curve with marginal costs of 0 EUR/MWh, 2020 was also very favourable in the spot market for electricity due to this fact. January 2021 showed us what it costs when little wind and PV is available.

CO2 is the main reason why there has been a significant change in the energy price situation in Europe this year: Coal has been replaced by gas in many market areas. Favourable gas prices and relatively high CO2 prices have made the production of electricity from coal uneconomical. As a result, the surplus of CO2 certificates in the EU ETS (EU Emissions Trading Scheme) has also increased further. Nevertheless, this did not have any influence on the price. On the one hand, this is due to the possibility of using the certificates in the future, and on the other hand, it is due to the expectation of rising CO2 prices because the EU’s emission reduction targets have been greatly increased. In 2030, we in Europe now want to have 55% fewer emissions than in 1990. Due to the high CO2 prices, the electricity forward market price for the next few years has also not returned to the 2018 level (price: 21.35 EUR/MWh for 2019). This year, the lowest value of the electricity market price for the next year was 34.9 EUR/MWh and currently the expectation for the German price is above 50 EUR/MWh and for the HUDEX above 55 ERU/MWh. The price increase compared to the previous year is mainly due to the CO2 price at the beginning of 2018 of approx. 7 EUR/MWh compared to the CO2 price of approx. 25 EUR/t on average in 2020.

Fundamentally, the economic recovery after Corona remains the main focus of price development on the spot market in the coming months. However, the outlook for the vaccination does not allow the markets to sink to a very low level any more. The spot market for electricity and gas will continue to offer opportunities in 2021, while the futures market will be strongly influenced by the CO2 price. Risk diversification therefore remains important.

In the light of all the above, we wish you good decisions and good days ahead, even if there will be no skiing holiday this year.

For the Inercomp team

Felix Diwok