Market commentary

July 2024

“Price chaos on the power exchange” – this is more or less how most media headlined the events of 25.06.24. The facts are as follows: on that day, the exchange auctioned unprecedented extreme prices for day-ahead spot electricity trading (EPEX Spot). An unbelievable EUR 236.28/MWh for Austria and EUR 492.04/MWh for Germany were on the books at the end of the day. Price volatility can occur at any time due to supply and demand. In this case, however, the cause is different and historical: for the first time, there were two different prices for Germany and Austria.
What happened? First of all: Supply and demand do NOT explain the price distortions. Also surprising: In addition to the “extreme prices”, “normal prices” (Base AT: 95.39 EUR/MWh; Base DE: 103.01 EUR/MWh) prevailed on that day in question, taking into account the physical transport capacities. These result from the market coupling auction and were auctioned on the power exchanges Nordpool and EXAA. Normally, these coupled results are identical to the prices on EPEX Spot. As EPEX Spot was unable to participate in the coupled auction due to technical problems, there are exceptionally two different day-ahead prices for the delivery day in question (1. coupled at EXAA and Nordpool = “normal prices” and 2. EPEX local = “extreme prices”). As most power supply contracts historically do not refer to the market coupling price, but only to the EPEX spot price, this price is decisive for most final consumers. To summarize: the price distortions were not caused by supply and demand, but by technical problems regarding the order situation of the local, non-coupled settlement of EPEX Spot.
Lessons learned: What this day has shown, is that a European coupled auction is an important and essential basis for price formation. Technical problems may occur anytime, but the coupled auction makes price formation more stable. A second exchange access is useful for trading participants to have the possibility of participating in the linked auction via another exchange in such cases.
Apart from such unpredictable events, which always remain a part of the crystal ball in energy market analysis, not much has changed in the fundamentals of European energy prices month-on-month. For most European countries the forecasts predict lower power and gas prices for this summer than in 2023. The economy and thus energy consumption are experiencing only a moderate increase, which will be more than offset by the ongoing growth of renewable energies. Only in Poland the increase in consumption is likely to be greater than the expansion of renewables. The expansion of renewables is therefore exceeding the slow growth in demand after the pandemic and inflation, which is according to classic market logic, depressing prices.
Let’s take a closer look at the development of demand. After adjusting actual demand for the temperature effect, we have seen strong deviations from the normal values before the crisis across Europe, with demand clearly in negative territory so far. Fresh figures from the first half of 2024 show a continuing stagnating picture: compared to the first half of 2023, electricity demand in Germany and the EU has risen by around 1%. While the growth rates in France look weak and there is no sight of expansion in Austria for 2024 with rates of around 0% (according to the Wifo Institute). The situation is more optimistic in Germany and the UK, which are driven by electrification. The “Euro Area Manufacturing PMI”, whose June value paints a deteriorating picture, also fits in with this.
Price development: A good gas supply situation led to a long-term downward trend from 2023 to the end of February 2024, which reversed in March, as the low-price level led to some CO2 short positions being filled. The subsequent upward movement, which was driven more by psychology and geopolitics, has now come to an end and June saw a downward or sideways trend. The market is waiting for a new impetus. Or have we arrived already in the summer/holiday season? The vacation season will clearly also characterize July, trading volumes continue to fall. Power has calmed down and prices are moderate. There is a similar outlook for July, provided nothing unforeseen happens. In general, many experts have the feeling that the fundamentals have had a stronger impact again in recent weeks and these look bearish.

High storage levels, a normalization of Norwegian supplies and reduced demand have also resulted in a subdued price drive for gas. When renewables are not producing combined with Germany’s nuclear phase-out and the low availability of French nuclear power plants, gas, as the last merit order power plant resource, continues to dominate power prices.
Speaking of renewables. The energy crisis resulting from the Russian attack on Ukraine has led to a sustained boom in PV supply. Renewable electricity generation increased by 8% in Germany in the first half of 2024 and by as much as 13% across the EU. The expected additional consumption from the moderate increase in demand in the Big6 countries (DE, UK, FR, PL, SP, IT) amounts to 16 TWh and could therefore be covered by 16 TWh of solar surplus alone, which would mean a decline in the residual load for the Big6 compared to the summer. Renewables are (over)compensating for the increasing hunger for energy – with exciting consequences for electricity pricing.
This is because the massive expansion is leading to more hours with low or negative spot prices. An example: In Austria, there has been an average of 90 negative day-ahead prices per year in the last 10 years. In 2024, there will already be 187 negative hours after six months. This means that PV systems are not only cannibalizing their own revenue, they are also resulting in 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, particularly around midday. Now either generation can react by shutting down or the consumption side can adapt to the new situation. We lack additional, flexible consumption units – preferably ones that drive decarbonization in other sectors: E-cars, battery storage, Power2Heat plants, electrolysers and heat pumps. However, similar to the construction of wind turbines or the development of new natural gas fields, the construction of consumption-side plants with technical planning, approvals and financing takes a lot of time and lead time. Ultimately, it comes down to a race between the expansion of further renewable generation plants and the expansion of new consumption units. As a result of the strong expansion of PV, it is unlikely that we will see fewer zero hours next spring than at present.
However, this can also be positive: In the past, using electricity for sector coupling with the plants was very expensive. With the increase in cheap electricity hours, investments in these assets, which are important for decarbonization, are becoming increasingly profitable.
For this summer, we expect prices to be low in purely analytical terms, although significant price reductions are not to be expected, as the geopolitical threat situation is too risky and pricing is to a significant extent psychological in nature. We hope that this outlook will help you in your decision-making.

Yours, Felix Diwok, CEO

For the Inercomp team