After the record highs witnessed in the Irish power market in August, the wholesale cost of power took a much needed downward turn.
On average, prices in the SEM Day Ahead market decreased by ~25% month-on-month. September’s outturn was €291/mwh, compared to €394 in August.
The bearish turn was affected by significant decreases in the NBP gas spot market, both at the beginning of the month and then from mid-month onwards.
1. High volatility with a general upward tick for Gas prices
- The communication of confidence around gas storage levels, by Germany and other key countries in Europe, at the end of August brought relative stability to the gas markets in September, in what otherwise might have been a rather more turbulent and bullish month overall.
- At the beginning of the month, flows to Europe through Nord Stream 1 pipeline came to a standstill, with Gazprom citing an oil leak found during a late scheduled maintenance. This did not come as a total surprise as many remained skeptical around whether flows would resume after that 3 day maintenance period. The initial bullish turn in prices, in the week after that incident, was followed by a more bear like trend in the later two thirds of the month.
Nord Stream damage and Russian gas flows
- The apparent sabotage of the Nord Stream Pipelines in late September will do nothing to reassure the market that ‘normal’ gas flows from Russia to Europe will resume any time soon.
- Finger pointing is likely to continue, until investigations can reveal who is to blame for the damage to that critical piece of European energy infrastructure. In the meantime, authorities are on high alert to protect other such infrastructure from any possible further attacks
- The market has remained remarkably calm in the wake of the damage to the pipelines. In fact gas prices have generally continued to fall since then, suggesting that zero gas flows through that source, in the near to mid future, may have already been priced in before the damage occurred.
- The graph below shows the decreasing Russian flows, across key routes to Europe, since the beginning of the war in Ukraine. As that Russian gas supply appears to move out of reach, much more importance will be placed on the availability of LNG and also on reducing gas consumption.
LNG and Price Caps
- Europe continues to import record volumes of LNG in 2022 and LNG volumes have surpassed Russian gas flows since June. The availability of LNG to replace Russian gas and boost European gas stocks will be crucial in the coming months
- The high price commanded for gas in Europe has been a key factor in those record inward LNG flows. Any discussions around price caps on gas will have to consider whether such a move will impact supply. Germany and the Netherlands have voiced concern around this recently as the idea of a price cap on gas gains more traction. Both countries have invested heavily in new LNG ports 2022.
Storage and Consumption
- European aggregated storage sites appear to be on target to exceed levels mandated by the European Commission for November. Aggregated European storage sites have been heading towards 90% fullness, with October the last month for shippers to keep injecting gas into stocks before the system switches to net withdrawals for the reminder of the winter.
- Consumption has been down in Europe recently, as many countries look to prepare for life after Russian gas. Usage will increase as we head into Winter and the EU Council will consider much tougher reductions, should the target of a voluntary 15% cut to consumption over winter not to be reached.
2. Wind has played a critical role in keeping the Irish wholesale power cost in check throughout September
- Renewables, in the form of wind, contributed 26% of the generation Mix in September.
- Wind has played a critical role in keeping the Irish wholesale power cost in check throughout September. The graph below shows that when wind generation is up, the cost of power is generally down (notwithstanding significant movement in the NBP gas market).
3. Outages down from August
- Outages in September were down on August levels and were also lower than that those experienced during the 2021 Capacity Crisis.
- It is critical that a low level of outages is maintained and such a crisis can be averted this year.
- Power Forward prices in the Irish market reduced during September, from record levels reached in August.
- The risk premium taken on since the breakout of war remains, thus impacting the forward price of energy in Ireland and elsewhere.
- Strained global gas supply, the threat of fresh sanctions on Russia and general chaos gas markets should ensure that a high level of risk premium remains in the near future.
September 2022 was another momentous month politically in the European Union. As war rages on European soil, EU Commission President, Ursula von der Leyen, gave an extraordinary State of the Union Address on 14th September, outlining the following measures, which are to be taken in combatting soaring power costs across the EU, that threaten to destabilise the whole region:
- Proposal to raise more than 140 billion euros for Member States to cushion the blow directly.
- Funds to be raised through top slicing of excessive revenue from non-gas generators and a solidarity tax from excessive profits of fossil fuel generators.
- A review of the short-term marginal cost power pricing model, which has is seen as not fit for purpose in crisis times.
Price Caps on gas, which have divided member states, were not included in the proposals put forward in that State of the Union Address. However, the idea now looks to be gaining serious traction again.
Energy ministers from a number of countries have urged the European Commission to introduce a cap on natural gas prices as a priority to tackle the energy crisis. Ministers called for the cap to apply to all natural gas transactions, as opposed to gas imported from specific jurisdictions.
At local level, Budget 2023 was held in Ireland on September 27th and will provide the following supports to energy consumers:
- Domestic customers will be granted €600 in credits to their bills in 3 separate instalments. The first instalment is due to be paid before Christmas, with two further instalments in the New Year.
- Several support schemes will be set up to help Businesses, including the Temporary Business Energy Support Scheme (TBESS) and Ukraine Enterprise Crisis Scheme. Details of all related support schemes can be found at the link to the Department of Enterprise, Trade & Employment (DETE) website below:
12 month forecast
- The EU and local Government have stepped up measures and supports to help with the soaring cost of energy bills
- Geopolitical situation in Ukraine and potential for Russia to influence the gas market:
- Europe continues to import record volumes of LNG in 2022, with some nations, such as Germany, pushing through the development of new LNG terminals:
- Moral and Political demand for sanctions on gas and oil
- Storage: At the end of September, aggregated European storage sites appeared to be on target to exceed EU mandated November levels
- Vulnerability of the already strained and highly sensitive global gas market to any further supply chain disruptions
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