Market commentary

April 2024

How will prices develop in the coming summer? The following statements are to be seen without unknown extreme weather events (or nuclear power plant shutdowns in France) and apply in a year-on-year comparison with the previous summer. Almost all fundamentals point to prices for electricity and gas in most European countries for the summer of 2024 being and remaining lower 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 of renewable energies. Poland will be the only country where the increase in consumption is likely to be greater than the expansion of renewables.
In detail, there is also the bullish factor that several coal-fired power plants were or will be shut down in Germany before the summer. Although we expect this to play a more important role in the coming winter, gas-fired power plants will remain price-determining over the summer and therefore hard coal will contribute little to power plant generation in the summer months.
The main indication of the expected summer prices comes from the current gas and CO2 futures contracts. 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 fall in the fuel and CO2 complex, as EUA prices correlate strongly with gas. We support this line of reasoning and expect electricity prices to fall this summer compared to current market prices.
The fall in TTF gas prices since November last year has significantly reduced the cost of generating electricity with gas. In recent months, CO2 prices have tracked TTF gas prices as it is believed that lower gas prices should encourage coal-to-gas switching and thus lead to lower emissions. Given the current close causal link between gas and CO2, Reuters expects a further fall in gas prices this summer to be followed by lower CO2 prices. One caveat: the British CO2 prices. UKA (UK Allowances) already decoupled from EUA last year and have moved sideways in recent months. They have not followed the fall in gas prices and the EUA has therefore converged with the UKA.
The reduction in demand caused by extremely high prices in recent years is also reflected in the summer price expectations. After adjusting actual demand for the temperature effect, we have seen strong deviations from pre-crisis normal values throughout Europe. Last year, the reduction in consumption was up to -16% in Germany and at least -7% in France and the UK market. This winter, the decline in consumption in the UK and Germany has decreased somewhat. This may be due to a partial recovery, greater electrification or a combination of both. In France, the decline in demand appears to be more persistent.
The reduced demand forecast has been factored in by Reuters 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 sign of a recovery in consumption.
The energy crisis following the Russian attack on Ukraine has brought a boom in PV supply that will continue this summer. 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 Reuters forecast for the increase in wind energy shows an increase of +26 TWh (or: +20%) in an average weather scenario. However, the forecast values for wind power fluctuate significantly more in the weather scenarios 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 (particularly in the UK and Spain).

The additional consumption of 16 TWh could be covered by the 16 TWh solar surplus alone, which would mean that the overall development of the residual load for the Big6 would decrease compared to the summer, and the residual demand would be reduced by a total of 26 TWh (minus 4% Y-o-Y).
We also see that the conversion of electricity generation to other fuels can only take place to a limited extent this summer: Hard coal-fired power plants in France, the UK, Spain and Italy will remain almost or completely shut down due to the high short-term marginal costs (SRMC) and/or the almost finalized national coal phase-out plans. This leaves only Germany, Poland, the Czech Republic and, to a lesser extent, the Netherlands with the option of switching from coal to gas or from lignite to gas. Poland and the Czech Republic have little gas-fired power plant capacity to which they can switch, but both countries can increase their imports from countries with greater spare gas capacity. The only country where switching to lignite on a larger scale is possible is Germany, although lignite power plant capacities are also smaller compared to last summer. With the given market-based SRMCs, Reuters expects the spread between Germany and France to narrow. The traded BL Power Q3-24 shows a spread of currently 12 EUR/MWh between Germany and France, while Reuters expects a spread of around 3 EUR/MWh.
The forecast shows interesting results with regard to the expected net imports for the three core countries DE/FR/UK: Germany will continue to have high net electricity imports. In France, potential for more net exports is also expected this year in view of the improving fundamentals. In the UK, more relatively cheap electricity can be imported from France thanks to higher import capacities. In addition, the UK can import from Denmark via the new Viking Link.
Summers will become increasingly exciting in terms of pricing in the future. This is because the demand for cooling in summer is expected to increase more than the average annual demand. We hope that this outlook on “summer prices” will help you with your decisions.

Felix Diwok, CEO
for the Inercomp team