The increasing growth of renewable power sources across Europe remains a key factor affecting energy prices across the continent. With energy markets continuing to evolve in the face of climate change, no other driver is so important in defining the landscape of the energy sector.
This of course brings its own challenges, asking questions of existing market mechanisms, bringing forward the need for regulatory reform and continually posing new problems which require new solutions.
Growth of renewable energy sources to continue
EU countries added 73 GW of new wind and solar generation capacity last year, meaning renewables could supply close to 25% of the overall energy demand in the EU.
More growth is expected for low-carbon generation this year, at the expense of both coal and gas fired generation. However, concerns about cost increases, slow permitting processes and local opposition to deployment all need to be overcome in order to reach the EU target of a 42.5% renewables share in the final energy consumption mix by 2030.
Some high-profile projects, notably in offshore wind, were shelved last year due to cost concerns, highlighting risk that many planned tenders for new capacity will not get bidders. Decentralised energy resources such as rooftop solar and behind-the-meter installations may yet find opportunity as bigger projects continue to run into resistance.
Slow grid development also remains an obstacle for renewables expansion, as it makes it harder to connect new projects to the grid and to transport electricity from where it is produced to the main consumption centres across Europe. Greater deployment of energy storage assets will also play a role in solving this problem in years to come.
More negative prices
Surging intermittent renewable capacity in the European fuel mix has led to increased price volatility. This has been true across the continent, with negative prices spreading across Europe from Spain in the south to Finland in the north.
Finland stands out as a particularly interesting case, seeing more negative prices than any other European country last year. It is even more interesting when you consider that Finland also saw hourly spot prices soar to a record EUR 1,896/MWh in January 2024 amid a deep freeze.
We expect to see the regulatory impacts on renewables in the near-future too. For example, Spain experienced negative prices for the first time earlier this year, leading to calls for market reform from parties fearing negative prices will discourage future investments in renewables capacity.
Market reforms
EU policy makers are in the final process of agreeing key reforms aimed at making the market more efficient, while also protecting consumers from price shocks similar to those we saw in 2022.
Support for new power generation will also be harmonised through two-way Contracts for difference. Under these proposals, states will protect producers from low prices in return for taking more of the profit when prices are above an agreed price level, though there are some concerns this focus on support will weaken the market signals for new investments.
Clash of models
The European Commission has proposed the introduction of virtual hubs for futures trading. These have been modelled after the joint Nordic system price which pools liquidity from various Nordic bidding zones into a joint reference price for financial contracts.
Some see this is as preparation for a possible split of the unified German bidding zone, which currently works as a benchmark for futures electricity trading across Europe.
However, German exchange EEX strongly opposes such a split and has recently launched individual futures contracts for each of the 12 Nordic bidding zones, which will provide an alternative approach to the incumbent hub model.
Interest in the new contracts has so far been muted, but could increase if and when the EEX is allowed to proceed with its takeover of Nasdaq’s power derivates business agreed last summer. However, this remains under scrutiny by the European Commission.
Waiting for consumption growth
European power consumption dropped significantly during the 2022 energy crisis. This has yet to return to pre-crisis levels, despite a pick-up in the second of last year after prices had normalised.
Most countries expect demand to sharply pick up towards the end of this decade due to increased electrification. This can include anything from transport to industries, though the pace of change in this area maybe slower than some believed only a few months ago.
For example, Sweden’s TSO, Svenska kraftnat, recently slash its long-term power demand forecast for 2027 by 11% compared to a year ago. This change in projections came as expected investments in new electrolyzers and battery manufacturing have been delayed.
A slower demand growth trajectory may prevent power prices from rise much over the next few years on average, though the increased role of intermittent power in the fuel mix is likely to keep prices volatile until new flexibility is added to the system.
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