MARKET COMMENTARY

Europe is facing a structural reorganization: climate policy, energy prices and industrial competitiveness are closely intertwined. At the beginning of November, the Council of the EU adopted a binding interim target for 2040: a 90% reduction in net greenhouse gas emissions compared to 1990. Parliament still has to approve this. At the same time, the framework contains new rules for international CO₂ certificates from 2036 onwards, the formal crediting of permanent CO₂ removals (e.g. CCS) and greater flexibility options between sectors. A biennial review is to link the target to scientific and technological developments.

The Commission reports progress: in 2024, emissions fell by 2.5% compared to 2023; net emissions are well below 1990 levels, while GDP has grown significantly. This decoupling is positive, but it remains unclear to what extent emission reductions are due to real technical progress rather than declining industrial activity.

The Clean Industrial Deal (CID) is the central interface between political goals and industrial practice. It focuses on three core objectives: affordable energy, acceleration of key technologies (e.g. batteries, heat pumps) and increasing the circular economy rate. Operationally, the CID complements the CISAF aid framework, which enables Member States to provide targeted support for electrification. This is politically significant, but the deal remains incomplete in several respects: it does not set binding energy or resource savings targets, does not clearly prioritize scalable technologies, and carries the risk of creating new industries primarily through subsidies rather than competitive cost structures.

Market realities exacerbate the challenges. Since 2005, fossil fuels have become cheaper in real terms (gas by around 15%, oil by around 30%), while power has become around 10–15% more expensive in real terms. The main drivers are CO₂ costs; grid fees and other ancillary costs are also contributing to inflation. Strong regional divergence in power prices (front-year spread between west and east ~200%) reflects different generation mixes: Spain benefits from wind/solar, France from nuclear energy, Poland suffers from high CO₂ intensity. Austria and Germany lie in between and act as transit and distribution regions, respectively.

Political measures such as the skimming of producer rents (Austria: energy crisis contribution from EUR 90/MWh) offer limited fiscal leverage, as there are hardly any surpluses on the current futures markets. CISAF does open up scope for action, but the unequal fiscal capacity of the member states (Germany/Belgium vs. poorer countries) threatens to create new distortions of competition and production shifts within the EU.

This leads to three practical conclusions for industry and policymakers: First, subsidies should be clearly focused on technologies that are already scalable and reduce costs in order to generate leverage effects. Second, greater EU harmonization of CISAF application rules is needed to limit market distortions. Thirdly, structural policy investments — grid expansion, storage, load management — take economic priority over short-term subsidies because they permanently reduce full costs.

Without this focus, there remains a high risk that decarbonization will be achieved through industrial decline rather than sustainable innovation — which is economically inefficient and questionable in terms of climate policy. The CID can provide a framework; whether it makes Europe's industry competitive and climate-compatible will be decided by its implementation: prioritization of scalable technologies, coordinated funding logic and structural infrastructure investments.

Both Germany and Austria experienced their third most expensive month of the year in terms of spot prices. At EUR 116/MWh in Austria and EUR 101/MWh in Germany, prices reached the levels seen in the expensive winter months of January and February. The price-dampening PV summer/autumn period is over; expensive power production is once again being driven more strongly by fossil fuel generators, with only a few days of wind mitigating the effect. Prices remain high during periods of calm. A look at the last week of November: Wind generation was 17% below normal, PV 10% below; combined wind/PV production was 3.5 TWh — around 0.7 TWh below normal. At the same time, temperatures in Germany were below normal, which increased demand by around 1 GW (+1.7%). The combination of reduced supply and increased demand led to high prices in line with market conditions.

The futures market is showing a two-pronged dynamic: in the short term (front year, Cal-26), the sideways movement remains intact; in the long term, Cal-28 is trending significantly upwards and reached its highest level in over two years at the end of November. This divergence cannot be explained by gas prices — Cal-28 is trading at its lowest level since March 2022 on the TTF — but rather by the strong influence of the CO₂ price, which rose well above EUR 80/t in November, fuelling long positions in power. With falling gas and rising CO₂ prices, efficient gas-fired power plants could displace coal-fired power in the merit order and offer baseload in the longer term; at the same time, coal often remains necessary for peak loads, which keeps prices high.

The market sentiment for gas remains bearish: LNG inflows and Norwegian exports are robust, and lower storage levels than last year are not currently generating any structural upward pressure. The fall below the EUR 30 mark was driven by geopolitical factors and hope — news of possible progress in mediation negotiations between Russia and Ukraine had a greater impact on sentiment than fundamental indicators. In short: the fundamental supply situation is stable to comfortable, but politically-driven headlines remain the price drivers.

Gifts of uncertainty lie under the Christmas tree: neither the spot nor the futures market are delivering clear gifts on the power market. December is unlikely to deviate significantly from the average of around EUR 100/MWh seen in the last two months. The holidays may bring structural relief, but they will not bring sustainability – neither in terms of low spot prices nor low environmental impact due to the large number of surplus gifts. Two questions remain unanswered in the futures market: How low can the gas price fall? And when will its downward momentum translate into lower power futures prices? Experience from 2022 shows that gas can fall even further, and the current stable supply suggests further downward pressure. However, political negotiations can quickly change the picture. At the same time, the CO₂ price is rising sharply and increasingly driving power price developments. All in all, gas is pushing down, CO₂ is pulling up – and power is finding a sideways balance.

In Christmas terms: the lights at the market flicker, but they do not go out — they mark the way. The decisive factor remains whether politicians and industry will make the infrastructure and funding decisions in the coming months that will transform the flickering into a sustainable glow.

Yours, Felix Diwok

For the Inercomp Team