As power prices across Europe hover around EUR 100/MWh, we take a look at the factors driving the current bull run and what this means for the power generation mix.
August 16th, 2021
This blogpost is authored by a member of Montel's content marketing team.
Lower levels of renewable generation (wind in Germany for example) has also played a part here, along with an international rebound in demand as we begin the recovery - such as it is – from the COVID-19 pandemic. The rally associated with demand recovery was expected, but the extent of it has surprised even the most optimistic estimates from this time last year.
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Given how expensive fossil fuels are now proving to be when compared to renewable power which have virtually zero marginal costs, if now is not the time to cut power sector emissions through a roll out of more renewables, you have to ask the question, when will be?
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Understandably, a reduction in power prices is now expected into 2022, but before that, Europe still has to navigate the coming winter, with a tight situation on gas following disappointing flows this year meaning that stocks may not have been replenished to expected levels. With bidding for LNG cargoes competitive across the globe, this will no doubt continue to support power prices into the coming season.
Our most recent Montel Weekly podcast also detailed how the more stringent carbon scheme in Europe is now the main driver for soaring carbon prices - and despite that the movement in coal is astonishing. Taking a rough global average from last year, prices fell to somewhere near $50 per tonne, but if you now look at the Newcastle contract for delivery in Sep-2021 (below) it’s more than tripled in value since then to just under $170 per tonne.
Despite that, coal fired generation in Germany is up 38% in H1 2021 - and whilst that is a notable jump from what we saw last year due to the demand destruction caused by national lockdowns - we still won’t be returning to 2019 levels of coal-fired generation, owing to policy announcements ensuring the phase out of coal over the next few years.
As fossil fuels continue to be displaced over time with the advent of battery storage, hydrogen and increasing amounts of renewable generation across the European energy mix as these technology types achieve grid parity, power markets will of course change and adapt to new drivers, though we can expect gas and carbon to remain significant influences for some time to come.
