{"id":107240,"date":"2021-10-18T09:45:00","date_gmt":"2021-10-18T13:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=107240"},"modified":"2022-11-21T09:48:31","modified_gmt":"2022-11-21T14:48:31","slug":"four-charts-that-explain-europes-power-price-surge","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/commodities\/four-charts-that-explain-europes-power-price-surge\/","title":{"rendered":"Four Charts That Explain Europe\u2019s Power Price Surge"},"content":{"rendered":"\n
By: Mark Lacey & Alexander Monk<\/h2>\n\n\n\n
Soaring gas and electricity prices are here to stay this winter, and highlight the need for increased investment in energy transition technologies.<\/strong><\/p>\n\n\n\n
Rising gas and electricity prices have been hitting the headlines in recent weeks. Europe appears to be the centre of the storm, although it\u2019s certainly not alone in seeing sharp price increases. China is also suffering energy shortages and is rationing power in some provinces as a result.<\/p>\n\n\n\n
Many of the supply and demand drivers behind the price rises are also global in nature. However, there are some Europe-specific factors that could serve to keep prices high and there is no easy fix to bring prices back down rapidly.<\/p>\n\n\n\n
Power prices soaring<\/strong><\/h2>\n\n\n\n
Firstly, as the chart below shows, power prices have jumped sharply in Europe in recent weeks. Most of this price surge is to do with shortages of natural gas.<\/p>\n\n\n\n<\/figure>\n\n\n\n
Natural gas has long been seen as a \u201ctransitional\u201d fuel for power generation. Compared to coal, it produces the same energy but with half the CO2 emissions. It\u2019s by no means a long-term solution if we\u2019re going to reach net zero emissions targets (unless carbon capture technology can be applied) but it\u2019s a useful stopgap while coal is phased out.<\/p>\n\n\n\n
However, partly as a result of its doubtful long-term future, there has been underinvestment in natural gas. Many integrated oil & gas companies have been reluctant to sanction new projects given that their wider aim is to transition towards renewable energy.<\/p>\n\n\n\n
Meanwhile, low regional gas prices in previous years caused various LNG (liquified natural gas) export projects to be stopped or deferred. Projects that would have been providing supply in 2019, 2020 and 2021 are now only likely to supply global gas markets in 2025 and beyond.<\/p>\n\n\n\n
At the same time, gas in storage is low globally. The chart below indicates how gas storage levels in Europe are far below the norm as we head into the colder winter months.<\/p>\n\n\n\n<\/figure>\n\n\n\n
Lack of wind denting renewable output<\/strong><\/h2>\n\n\n\n
That shortfall in gas availability is now coinciding with an increase in demand. Recent coal-fired shut ins and unfavourable weather are impacting other sources of power generation. The chart below shows how wind speeds in the UK have been far lower than usual over much of the summer and into September, negatively affecting wind power generation.<\/p>\n\n\n\n<\/figure>\n\n\n\n
The current situation is not an argument against the ability of renewable energy to supply our power needs; it merely highlights how the investment rates in the energy transition space need to increase.<\/p>\n\n\n\n
If countries are going to meet their ambitious 2030 targets to reduce harmful emissions, they will need to up investment levels. In turn, this will provide much needed flexibility in global power markets.<\/p>\n\n\n\n
No easy answers<\/strong><\/h2>\n\n\n\n
However, that will take some time and there is no quick fix to overcome the gas shortage right now. The Groningen gas field in the Netherlands, once Europe\u2019s biggest gas producer, has reduced production dramatically over the past decade due to earthquake risk from drilling.<\/p>\n\n\n\n
![\"European](\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\")
<\/figure>\n\n\n\n![\"European](\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/schroders_10-18-21_1.png\")
<\/figure>\n\n\n\n![\"GIE](\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/schroders_10-18-21_2.png\")
<\/figure>\n\n\n\n![\"UK](\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/schroders_10-18-21_3.png\")
<\/figure>\n\n\n\n![\"European](\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/schroders_10-18-21_4.png\")
<\/figure>\n\n\n\n