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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Moody’s Expects Power Prices In Europe To Stay Higher-For-Longer

  • Power prices in Europe are set to remain at historically high levels for years to come due to a lack of electricity generation.
  • High energy prices will mean there is lower power demand, but the supply gap due to a lack of Russian gas will offset demand destruction.
  • Europe's hydropower and nuclear energy sectors have struggled this year due to drought and strikes, a trend that will have to change in 2023.

Europe’s power prices will not come off historically high levels anytime soon as the supply for all electricity generation sources is tight and likely to remain so in the medium term.  That’s the headline message from a Moody’s report this week, which found that “Wholesale power prices in Europe are expected to remain at historically high levels in the medium term.” 

Power generation will be tight this winter, especially in northwestern Europe, due to the low availability of French nuclear power generation and lower hydroelectric supply, Moody’s said.  

Tight Winter Power Supply 

“The electricity supply/demand balance this winter will be tight in most north-western European markets because of low nuclear availability in France, low levels of hydroelectric power across Europe and risks to gas supply,” said Paul Marty, Senior Vice President at Moody’s.

Southern Europe could be spared the worst because it has more renewable power generation and more LNG import facilities, according to Marty. 

Historically high wholesale power prices will persist, “though with marked differences between countries,” the credit rating agency said. 

“This is despite our expectation of lower power demand in 2022-23 due to industrial demand destruction, itself triggered by high energy prices, and voluntary energy saving measures.” 

Next Winter Is The Real Concern 

Europe is more or less prepared to face this winter with nearly full gas storage sites and a steady flow of LNG imports. The real concern about gas supply is for the winter after that, the top executives of Europe’s biggest oil and gas majors said just before the heating season began.   

Related: Bets On $200 Oil Surge As Traders Eye Extreme Volatility

Ahead of the 2023/2024 winter, the gap in gas supply in Europe will be much wider without Russian gas. Europe will not be importing much Russian gas - or none at all if Russia cuts off deliveries via the one link left operational via Ukraine and via TurkStream - compared to relatively stable imports from Russia in the first half of this year before Moscow started gradually cutting volumes via Nord Stream in June until shutting down the pipeline in early September.

Gas supply is just one of the concerns for European power generation and prices this winter and all other winters ahead. Nuclear power generation in France has suffered setbacks this year, and currently, just over 50% of the French nuclear power fleet is available. 

Early this month, power giant EDF revised down its estimate for the 2022 French nuclear output to 275-285 TWh, compared to the previous estimate of 280-300 TWh. 

This lowered estimate takes into account the impact of strikes on maintenance schedules in the autumn of 2022, as well as outage extensions at four nuclear reactors involved in the program of inspections and repairs related to the stress corrosion phenomenon, EDF said in a statement.

France, traditionally a net exporter of electricity, even became a net importer of electricity in the first half of 2022 due to the issues at its nuclear power plants. 

Lower hydropower generation due to drought-like conditions across Europe has also lowered power supply this year. Just this month, Spanish utility giant Endesa said it would idle the fifth-largest hydropower plant in the country from the middle of November after drought and warm weather in recent weeks had reduced water in reservoirs to unsustainably low levels.

This year, hydropower generation has been 32% lower than the average for the past ten years because of a lack of rain, the lowest hydropower generation in Spain since 1989, according to local outlet La Vanguardia

All those operational issues, combined with the slashed gas supply from Russia, have sent European power prices to record highs this year. 

And according to Moody’s, there will be no immediate respite. That’s why the EU is looking at ways to reshuffle the price-setting on the European electricity and energy markets. 

Fundamental Reshuffling Of Europe’s Power Markets Ahead

“In the longer term, the review of the current price-setting mechanism based on the marginal fuel could lead to a fundamental reshuffling of the power markets in the EU and/or the UK,” Moody’s said in its report. 

Early next year, the European Commission will propose a structural overhaul of the European electricity market to decouple power prices from gas, Maroš Šef?ovi?, Vice President of the European Commission for Interinstitutional Relations & Foresight, said earlier this month. 

“This should also help ensure that no one source of energy can cause the kind of market disruption that we are currently experiencing,” Šef?ovi? added.  

Other interventions the Commission has proposed include advancing work to create a new LNG pricing benchmark by March 2023, and in the short term proposing a “price correction mechanism to establish a dynamic price limit for transactions on the TTF gas exchange, and a temporary collar or bandwidth to prevent extreme price spikes in derivatives markets.” 

The EC also proposed last week a new temporary emergency regulation to accelerate the deployment of renewables.

The new emergency regulation, which will apply for one year, “targets specific technologies and types of projects which have the highest potential for quick deployment and the least impact on the environment, contributing to our energy security in the face of Russia’s invasion of Ukraine and weaponisation of its energy supplies.” 

These emergency regulations could help to some extent, but they are unlikely to solve the energy crisis soon enough to spare Europe from persistently high wholesale electricity prices for some time.

By Tsvetana Paraskova for Oilprice.com

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