European countries are on track to break the July record as the highest-priced month ever for energy, with just one week left of the month.
The new normal of records being broken on an hourly and daily basis comes on the back of surging gas prices and reduced power from renewables and nuclear.
Should the current trend continue, then winter power prices will be punishing for European consumers large and small.
Another record breaking week in European power markets, with both spot prices and forward prices reaching new highs, yet again mainly caused by the gas market, in addition to other fundamental supply drivers in nuclear, coal, hydropower, and other renewables.
As stated in last week's note, August is on track to be the new record for most European markets, a picture that has just strengthened over the last week.
This is the case for Italy, France, Germany, the UK, and parts of the Nordics.
For the first time ever, a major European market could end up with a monthly average spot price above €500, as Italy is averaging €504 so far this month.
As expected, week 34 also broke the weekly record for several markets, with Italy in the lead once again reaching €506 for the week.
The gap between different markets has closed significantly, with both France and Germany being very close to Italian prices, reaching €486 and €481 for the week, respectively.
Prices have continued to surge at the beginning of week 34, and for the first time since early April with the UK and France both having averaged above €600 per MWh so far this week, even higher than in Italy.
Therefore, both the weekly and monthly record is set to be broken for most countries, which does not bode well for the coming winter.
Movement in the futures market has also been very strong, with fresh new records both on short and long-term contracts, mainly caused by the gas market.
Since gas is the marginal producer of power in many countries during many hours of the day, power and gas contracts are typically highly correlated.
This has also been the case in recent weeks, with very volatile gas prices, but with a similar movement in the power market.
Most power contracts reached a new all-time high on Aug. 22, when Germany’s front-month reached above €600 for the first time, closing at €613 per MWh.
Even higher prices were reached in France, where the front-month closed at €690 the same day.
It's not looking much better further out in time, as also the front-year contracts reached new highs, in Germany closing at €645 and France €840 on Monday.
There has been a similar surge in the gas front-year contracts, but also in the short-term futures and spot contracts, gas prices have reached new highs and been the main driver of the record power prices.
The TTF day-ahead spot contract broke its all-time high on Monday, closing at €272 per MWh.
The TTF front-month was slightly higher, closing at €278 the same day.
The reasons for the large surge have been another update in the European supply situation, as sudden maintenance on Nord Steam 1 for late August was announced, completely closing flows for three days.
Market participants worry that the flows may not return at all after that, adding upwards pressure on prices for market participants to secure their gas supply.
On the positive side, injection levels into storage have remained healthy, and overall Europen storage stood at 77.42% as of Aug. 21, closing in on the EU target of 80% by Nov. 1.
Additional drivers of the exceptionally high spot and futures power prices have been the shortfall of nuclear and hydropower, impacting total European supply all year long.
In addition, coal continues to be traded at very high levels, with European reference prices once again closing in on $400 per tonne.
The API2 CIF ARA front-month contract is now trading at $398 per tonne, the highest level since March.
Even with this price of coal, it is still a much cheaper source of power generation compared to gas, with the current fuel prices.
Carbon prices also reached a new all-time high over the last week, reaching €98 per tonne at the the Aug. 19 close.
Since then prices have been reduced a lot, trading at €90.8 per tonne at the time of writing.
There have been mixed drivers for the movement of carbon lately, with extremely high clean dark spreads supporting upwards movement, but on the other hand fears of economic slowdown being a bearish factor.
The European Commission has approved a massive €27.5 billion German support scheme to compensate energy-intensive companies.
The now approved measure will cover parts of the higher electricity prices arising from the impact of carbon prices on electricity generation costs in the period 2021 to 2030.
The aim is to prevent so-called “carbon leakage”, where companies relocate their production outside the EU, to countries with less ambitious climate policies.
Nordic TSOs are urging Norway to not go through with measures to limit electricity exports to neighboring countries, as stated in a common response by Energinet, Svenska Kraftnat, and Fingrid.
Norwegian TSO Statnett and state-owned utility Statkraft have voiced similar concerns to decision-makers.
The government has not identified criteria for any possible export ban and is waiting for guidance from the regulator, RME. – Fabian Rønningen
Average power prices have started to cool off from the summer peaks across the U.S., averaging $86 per MWh. However, the daily minimum power prices are at an all-time high.
This past week, average daily minimum power spot prices rarely went below $50 per MWh, compared to May where the average minimum was around $27 per MWh.
July had the highest average power prices of the summer at around $92 per MWh, but the average minimum of the same period was $42 per MWh.
Higher minimum daily prices are a direct result of some of the highest all-time prices in coal and gas in the U.S.
Henry Hub natural gas spot prices this past week were the highest since before the Covid pandemic.
Coal spot prices generally increased to record highs in the last week as well.
The average Henry Hub natural gas price reached over $9 per million British Thermal Units.
Although the electricity demand is dropping in coordination with national temperatures, higher costs of generation are driving up the minimum generation costs. – James Ryan Kronk
Fabian Rønningen and James Ryan Kronk are analysts with Rystad Energy