Market commentary

March 2023

Europe was lucky in the previous year when it came to energy prices. After a year of extreme gas and power prices in the spot market, the price explosion expected in summer 2022 did not occur in 2023. Conversely, the spot market price for power and gas in the first weeks of 2023 has been far below the levels of last summer.

The main cause of high energy prices is the Russian attack on Ukraine, which is slowly becoming a war of attrition. And the end is still not in sight.

So why the sharp drop in prices? We have had above-average temperatures in Europe in Q4 2022, which has greatly dampened demand. Therefore, the feared worst case did not materialize and at the same time renewable energies performed well over the winter. Even in the first ten weeks of 2023, there was no downward temperature outlier and the supply of wind power was above average. March also brought good yields in the 2nd week. We therefore expect the eu’s gas storage facilities to be filled to more than 55% by the end of the winter season.

The gas price will remain dominant for pricing in the power market and for coal demand in Europe in the coming months. Coal-fired power plants in Europe are running at full load, and Germany’s nucle-ar phase-out will lead to additional shortages on the power market when the three reactors are shut down on 15 April 2023. Gas will thus remain the tipping point for power prices. In March, it has now emerged that gas prices on the spot market are again so low that competition between coal-fired power generation and gas-fired power generation is beginning again: thus, gas consumption is currently on the rise.

Hopes for a further drop in power prices are supported by the weather and the availability of French NPP production. Hydrology in Q1 tends to be expected to be better due to climate change, but worse in Q3 and thus we believe in a good supply from renewables in the coming months, summer is a concern.

What happens next? The Russian war in Ukraine remains significant. However, Europe is slowly getting used to the lack of Russian gas supply. The high prices are a strong long-term incentive for additional supply of LNG and a switch to renewables. The war with Russia is expected to last even longer with each passing day and thus market participants are getting used to the uncertainty and forward market prices are steadily decreasing, also because the German LNG terminals in 2023 and 2024 will significantly improve the supply situation. Just under 135 EUR/MWh is now the cost of power (BL) for 2024 and 115 EUR/MWh for 2025. It now looks less catastrophic for European economies than it did in November. However, Europe’s competitive disadvantage against the US and also some Asian economies remains high. It could quickly widen again if a technical or weather-related extreme event occurs. In our view, the coming summer in particular is fraught with price risks.

Despite all the unfavorable influences in the short term, we expect prices for gas and power to be much more favorable in the distant future than futures market prices show today. The current high prices influence supply, and renewable energies are the most cost-effective and politically stable form of electricity production. At the same time, the CO2 price at currently approx. 95 EUR/t pro-motes the move away from coal.

For 2023, however, we only expect more favorable prices at the level of below 100 EUR/MWh for power or below 35 EUR/MWh for gas if the war takes an extreme turn and there is an immediate reconciliation with Russia. Whilst we can imagine what would have to happen for this to be possible, it is not on the horizon of expectation. In the meantime, European markets remain a pawn between weather, sanctions, the energy cost equalization scheme and the constraints of war. And although Ukraine (physically) and EU-Europe (financially) are footing the bill of this conflict, both are the short-term sufferers with no easy options for action. The burden on the Ukrainian people seems in-humane and it is exasperating that Europe does not have a good hand in fighting the injustice caused by Putin.

The EU’s ban on Russian oil products from February 5th, like the ban on crude oil last year, has left no trace in the market price. Perhaps the end of the transport contract through Ukraine at the end of 2024 (Naftogaz with Gazprom) will still make a price movement. However, Russia’s influence is getting smaller by the day.

On the side of the energy producers, the profits they have to give up are getting smaller again and the excitement is receding. Perhaps only until the next extreme event. However, we expect that the sum of the measures working on all energy sources and also on demand will make energy prices fluctuate less and also further dampen the price level.


Yours, Felix Diwok, CEO, for the Inercomp team