Gas and electricity prices: Europe’s back is against the wall

Chart of the week

Since the start of 2021, energy prices in Europe have been rising to unprecedented highs. In recent weeks, European gas prices have reached 90 euros per megawatt hour (MWh): this is six times higher than in the United States on a comparable basis. The German electricity baseload, Europe’s de facto benchmark, has soared to over 150 euros per megawatt hour for the 1-month futures contract. Governments in both France and Spain have decided to intervene and announced gas and electricity price caps for households.

OUR ANALYSIS

These gas and electricity price rises are linked and also play a role in surging coal prices. Gas supply shortages in Europe are the root of the problem. Supply has been particularly affected by a fall in Russian deliveries due to both geopolitical and economic factors (environmental debate over the Nord Stream 2 project in Germany and strong demand from China following its boycott of Australian coal).

As a result, Germany has had to reactivate some of its coal-fired power plants, even though the country has shuttered most of its lignite mines. Rising demand has pushed up coal prices, which in turn has raised the cost of producing electricity, especially as wind power generation fell in 2021 due to unfavourable weather conditions (too little wind).

In addition, CO2 prices have risen sharply since the beginning of the year as the EU further tightens its emissions allowances. Fossil fuel energy production now entails the purchase of expensive CO2 emissions allowances, which then directly impacts electricity production costs in many nuclear-free countries.

Higher electricity, gas and coal prices create a self-perpetuating vicious circle, as rising electricity prices lead to higher gas consumption, which leads to gas prices remaining under pressure.

To avoid winter blackouts and heating shutdowns, consumers or governments will have little alternative but to pay the price as charged, unless the rules of Europe’s energy game are changed.

 

See also: https://lazardfreresgestion-tribune.fr/en/central-banks-norway-is-the-first-g10-country-to-raise-rates/

 

 

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The following opinion was written on October 10, 2021 and is susceptible of changing.

Sources : Bloomberg, and calculation from Lazard Frères Gestion

As of : October 10, 2021

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