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Wholesale Banking

Power price normalisation and grids expansion in European utilities

The energy crisis is behind us, and the European Commission has taken action to prevent further disruption over the coming years. European utilities will continue to grow in terms of both cash flow generation and investment, but at a less hectic pace. The extremely elevated power prices seen in 2022 and 2023 are also entering into a normalisation phase

The elevated gas and power prices of 2021 and 2022 are behind us. In France, where half of the nuclear fleet was out of service for maintenance, the baseload 1y forward contract averaged €548/MWh in 2022 on the wholesale market. The lack of nuclear availability in the country added to the disruptions caused by the European economic recovery and the almost terminated natural gas procurement from Russia. With European utilities finding other gas providers, a phase of power prices normalisation started in 2023. Thanks to higher procurement from Norway and liquified natural gas resources from North America and Qatar, gas prices came back to lower and more stable levels. The natural gas TTF contract trades around €32/MWhc, far below the €300/MWh mark attained in mid-2022. For power prices, this means more acceptable tarrifs for residentials and corporates – although in 2023, they were still three times more expensive than in the 2016-2019 period.

Actions have been taken to avoid another energy crisis

The Dutch TTF natural gas contract (one month forward) traded around €32/MWh at the end of 2023. The price is far below what the markets experienced in 2021-2022, but still twice as much what consumers were paying in the 2016-2019 period.

The EU has opted to extend measures to tackle excessive prices

At the height of the energy crisis, members of the European Union agreed on several measures to tackle excessive prices. The Market Correction Mechanism is one of the measures adopted. It is activated if the TTF price exceeds €180/MWh for three working days, and if the TTF price is €35/MWh higher than a reference price reflecting prices on international markets for the same three working days. Despite the fact that the mechanism has never been triggered since its implementation, the EU decided to extend the measure's expiration date to 31 January 2025 (from 1 February 2024 initially). The emergency measure to enhance European solidarity through better coordination of gas purchases is extended to 31 December 2024.

The reform of the energy market design for the long term

In November 2023, The European Council and Parliament reached a provisional agreement to reform the union’s electricity market design (EMD). Overall, the reform aims at boosting fossil-free energy to cut CO2 emissions as well as maintaining energy prices at affordable levels, especially in the event of a crisis. Several elements are tackled:

  • Protection of vulnerable customers: measures to protect vulnerable customers from energy disconnections have to be reinforced across EU member states. Criteria for declaring a crisis were agreed upon and measures to support disadvantaged customers with reduced energy prices to support energy affordability.
  • Power Purchase Agreements (PPAs): EU members are asked to encourage long-term contracts between power generators and clients.
  • Contracts for Difference: two-way contracts for difference will apply to investments in wind energy, solar energy, geothermal energy, hydropower without reservoir and nuclear energy new facilities. EU member states will have the flexibility to redistribute the revenues made through the two-way contracts.
  • Capacity remuneration mechanisms: when justified, exceptions can be introduced to the CO2 emission limit for authorised capacity mechanisms. These mechanisms have to be become a more structural element within the electricity market.

Power prices will retrench further in 2024 but remain elevated

Power price expectations for 2024 shared by Standard & Poor's and some utilities point to wholesale power prices between 1.5-2 times higher than the period 2016-2019. Going back to power prices seen in the period 2016-2019 will probably not be possible in the short term unless a severe economic recession breaks out. Despite the Dutch TTF 1-month forward contract coming down to €32/MWh equivalent at the end of 2023, this price is still double compared to the pre-Covid pandemic period. In some parts of Europe, LNG shipments from the United States and Qatar have taken over the gas flows originally coming from Russia – but at a higher cost.

In the UK and Italy, power prices being 1.5 times higher than in the period 2016-2019 would result in an average price just above €90/MWh. In France, the electricity price in the period 2016-2019 averaged €48/MWh. Prices being 1.5 times higher in 2024 would result in an average power price of €77/MWh.

To learn more, access the full report here.