Power prices in the UK and across Europe have surged in September as low wind generation as well as extreme bullishness in commodities and carbon prices have driven wholesale power prices to record highs.
In this ICIS Briefing we will discuss why British and European wholesale power prices have gained such strength in recent days and weeks and provide an outlook for the next two weeks.
What caused the power price spikes?
- British and European wholesale power prices
have spiked in September due to low wind output
and extremely strong commodity and carbon
- Carbon prices have risen by almost 50% between the beginning of April and September to above €60/tonne of CO2
- The European benchmark TTF gas price has risen by almost 200% to above €50/MWh in the same period
- European coal prices have also gained 70% to above $120/tonne
- This makes generating power from both coal and gas power plants extremely expensive. This is further exacerbated by thermal generators having to pay an additional price of more than €60/tCO2 for carbon emissions.
- What has driven British and European power
prices to such extreme highs in recent weeks
and days is that wind generation has been
- Taking one example date, the 6 September, low wind generation in the UK, varying between 0.5GW and 2GW out of an installed capacity of 24GW, meant that gas generation - and to a lesser degree, coal - surged to fill the gap.
- Gas is met close to 48% of demand on this date, up from the annual average of 40%, and coal met over 3% of national demand up from an annual average of below 2%.
- Because of the high carbon, coal and gas prices, the fossil fuel generation which is at the margin and sets prices, drives overall power market prices to such highs.
- The situation in Germany, Europe’s largest power supply and demand market, has been similar with wind generating less than 3% of total power generation on 6 September, versus a 22% average in 2021.The renewable share of total generation as a result fell to 37% on 6 Sep compared with almost 50% so far this year
- The situation in subsequent days following the 6 September has not changed significantly and this has caused price spikes across the region.
- A similar trend seen across Europe in which
fossil fuel generation has increased to
compensate for low wind at a time of very high
commodities and carbon prices has led to
near-term wholesale power prices rising to
above €100/MWh throughout September across all
continental European power markets as well as
above £100/MWh in the UK
- Prices were less than half as expensive at the same time in 2020 across these markets
- This has also affecting southern European markets such as Spain and Italy where gas has a significant role in meeting demand
- We expect that gas and coal prices are
likely to remain strong due to supply tightness
in commodities markets and that carbon markets
will remain around €60/tonne of CO2 until the
end of the year with limited downside risk.
This will keep fossil fuel generation expensive
across Europe over the coming months
- Returning to the UK where the highest price spikes have been seen over the past few days, an early National Grid outlook for winter has stated that while margins are tighter than last winter, they are still very much within the norm.
- This means that any strong bullish price direction will be set by a lack of renewable output caused by low winds and the level at which coal and gas is called upon
- Our outlook for wind generation remains on
the low side, with German wind generation set
to average 6GW for the next week compared to an
average in September of more than 10GW over the
last three years. The level of generation is
forecast to remain below 10GW until the end of
- This essentially means that German wind will remain approximately half as strong as we usually expect during September over the coming days and that coal and gas will need to generate more to meet demand levels.
- A similar situation is expected across other continental markets with below-average wind over the next two weeks
- Weather services sources expect extremely low wind in the UK over the next two weeks of an average well below 5GW for most of this period.
- One source of respite for continental markets is relatively stable to good French nuclear availability that reduces the need for coal and gas generation to an extent and this is one of the reasons the French market has not seen quite as strong price gains as in Germany for example.
- A further source of respite at the moment is the relatively strong solar output given the sunny weather conditions, with solar generation partially compensating for the lack of wind. However, if cloudier conditions set over the coming days, coupled with the continuing lack of wind, this will lead to the further increased use of thermal generation, with the resulting bullish impact on power prices.
- However, for the UK, until Friday morning this week, planned maintenance is taking out 500MW on the IFA cable with France, restricting import possibilities and therefore adding to the potential of further price spikes over the coming days if this is extended.
- Overall, we are bullish for UK and continental European power prices over the next two weeks given the low wind forecast in key markets (Germany and UK) that will increase the need for coal and gas generation
- Due to extremely high coal, gas and carbon prices, this ultimately will continue to drive wholesale markets at such high prices.
- The wholesale price spikes
are not specifically caused by system
tightness (as there is relatively low system
demand at this time of the year and ample
capacity margins), but due to the higher use of
more expensive technologies (gas) to meet
- However, this is indicative of the system risks ahead for the winter, when such a low-wind environment, coupled with higher demand, could cause low margins.
This analysis was originally published on 8 September by Stefan Konstantinov, Senior Analyst, and Roy Manuell, Analyst, at ICIS Energy.