The energy demand in Europe has structurally changed as a result of the historically high prices during 2022. Over the past two years, we have observed a 20% gas demand destruction and a 10% power demand destruction on the European markets. At the same time, we have seen a significant increase in renewable power generation installations and a recovery of French nuclear power production.
All of these events combined have resulted in an overall decrease of gas-fired power generation and therefore gas demand. In the long term, some of the industrial demand for energy is expected to return, but it is unclear to what extent, as many large companies are relocating their production to more economically attractive regions. Whilst prices have been more relaxed in the past couple of months, they are still 10 to 20 euros above the historical averages seen before the energy crisis.
Temperatures in the South and Southeast Europe have been consistently high for almost 2 months now, increasing the power demand and driving up the short-term power prices – especially in the Hungarian, Romanian, Bulgarian and Greek markets, and to a lesser degree in Italy. The above average temperatures are expected to persist for most of August as well.
The lower Russian gas flows have led to an increase of LNG imports to Europe. This means that LNG is now a much more influential factor than it was as recently as three years ago.
Therefore, events such as hurricanes in exporting locations, the Gulf of Mexico for example, are now becoming significant price drivers for European natural gas. Additionally, there is greater exposure to Asian gas fundamentals, such as heatwaves or infrastructure outages. Overall, the system is much more fragile, making weather extremes and global outages highly influential.
Geopolitical events are also important price drivers for natural gas – such as the military tension in Russia’s Kursk region, where the key gas hub of Sudzha is located, potentially further endangering the (still ongoing) Russian gas flow into Europe, as well as the political tensions between Iran and Israel.
The increasing power generation from renewables and declining use of coal/lignite have highlighted the importance of flexible gas-fired power veneration. Forward power prices thus mostly reflect the marginal cost of gas-powered generation.
All factors that affect the gas prices in Europe also indirectly drive the power prices. Through LNG, European gas and power markets have become even more exposed to global events and economic developments.