— By Dimitrios Koranis — 

In many European countries, the market for electricity is very closely intertwined with the market for oil and gas. The generation of electricity with natural gas accounts for as much as 40% or 45% in some cases – in Italy, for example – which has physical and price-related knock-on effects. Electricity prices had already reacted to the geopolitical (supply) shock at the beginning of March, albeit differently in each country.

The front-year electricity Base Cal 27 rose by approximately 10% to 15% in the first half of the month, especially in countries where LNG is part of the electricity mix. By the end of the month, the difference to the previous months (Jan/Feb) had risen as far as 20%. The sharp increase in the marginal costs of gas-fired power plants and a geopolitical risk premium on the energy markets were the main drivers of front-end prices. The higher fuel prices are also driving up forward prices (for the front month of April), although the level appears relatively balanced compared with March. The spot market reacted disproportionately, primarily indirectly via gas prices. Volatility is high, especially in intraday trading. Two opposing effects are at work here. On the one hand, the feed-in of renewable energies has a dampening effect on prices while, on the other hand, the short-term price jumps caused by sharply rising gas prices are having a negative impact. The latter in particular led to temporary – hourly – price jumps of more than EUR 150/MWh.

Related: Supply shock dictates gas markets in March

On the supply side, electricity generation is directly affected, particularly in Italy. From an EU policy perspective, the country is therefore currently considered a key risk candidate. Other critical countries with a high proportion of gas in the electricity mix are the Netherlands and Greece, each with around 35%. Their Base Cal 27 for electricity is correspondingly high, at around EUR 100/MWh. In contrast, France has a gas share in its electricity mix of at most 5%. Accordingly, the changes in its electricity Base Cal 27 compared with the previous months were rather moderate. However, as a very large LNG importer, France plays a key role in supplying other countries with gas for their electricity generation. The physical limitations of LNG on the one hand and, above all, price developments on the other are having a direct effect on electricity prices in other European countries.

From a demand perspective, the economic factors are overshadowed by geopolitical developments. The surge in energy prices increases the risk of a recession, which will have a dampening effect on prices in the long term, but would bring growth to a complete standstill. In this respect, the effects are being felt rather slowly, as the energy markets are “eating into” the end markets and clouding the economic outlook.

It is to be assumed that electricity prices on the spot market will be more volatile than in previous months and will remain at a relatively high level due to the additional demand for gas to refill gas storage facilities.

The futures markets will be dogged by the turbulence for even longer as the risk premiums are already included in the prices and don’t have to be paid until later – regardless of how the market has developed by then.

— Translated by Elspeth Lenhard