Relatively low pricing has prevailed throughout Q1 2023, with average prices coming in ~15% lower than Q4 2022 and ~30% lower than the comparative Q1 2022.
On average, prices in the SEM Day Ahead fell ~9% month-on-month. March outturn was €145/MWh, compared to €159 in February.
British gas (NBP) had a few volatile moments within the month, but has generally maintained the downward momentum seen already in Q1.
There were some signs, in the closing week of the month, that gas prices may have tested a floor (required to attract price sensitive LNG cargoes) in March.
Gas – Pricing & Supply
Although gas, spot and front month, prices continued a net downward trend in March, a small but notable level of volatility returned to gas markets at times during the month, as questions emerged around areas such as:
- Removal of remaining Russian LNG from the European grid.
- The impact of labour strikes at several French Nuclear Power sites and LNG terminals.
- Potential for demand spike as lower prices may lead to gas generation becoming economically favorable in April in swing states such as Germany.
Gas – Consumption & Storage
- Gas stocks across the EU remained historically high in Q1 2022. See data below, obtained from ICIS. While the warmer than expected winter has certainly helped, demand for gas in Europe has been targeted and reduced and the LNG has continued flowing, therefore reducing the need for withdrawals from storage.
- Encouragingly, from a price and energy conservation perspective, gas demand in Europe has remined below historical averages. See graph below, obtained from ICIS.
- Demand reduction remains high on the European Commission’s agenda, and they have recommended implementing 15% gas demand reduction again in 2023.
The EU continue to discuss market reforms
The EU held a number of high-level meetings to discuss energy market concerns and reform during March. Here are a few key takeaways from those meetings.
- Europe is playing catch up with the US and China in the green energy transition and EU leaders have announced measures to spur renewable power development by targeting areas such as supply chain integration and simplification of the permitting process.
- The European Parliament and the European Council reached a provisional agreement to raise its binding renewables target to at least 42.5% by 2030, up from its current target of 32%.
- They have however sidestepped any moves to decouple the price of Renewable and, the more expensive, Fossil fuel power generation on the European grid for now. Instead, they are encouraging providers to engage in longer term power purchasing contracts and Power Purchase Agreements (PPAs) to blunt the impact of high fossil prices over the coming years.
- Joint gas purchasing in the EU bloc is also an ongoing idea, albeit in its early stages. If successful, the joint procurement project has been touted as a potential model for other types of markets which could make the EU a more competitive player in international trade. The project already has its detractors however, a many would see such an approach as an attempt at monopoly, not aligned with traditional liberal values of the EU.
Another item that appears to have moved up the priority list in the EU is the removal of Russian LNG from the supply mix.
Interestingly, Russian LNG is reported to make up somewhere between 10-15% of all LNG flowing into Europe. Removing this volume of LNG from the mix would be seen as a morally correct decision but would likely trigger some upward movement in gas prices.
Source of chart here is Brugel.org
Renewables, in the form of wind, contributed 36% of the Generation Mix in March.
This was the lowest monthly generation in Q1 2023 and is more-or-less in line with the average wind generation for March, over the last 2 years. See graph below.
The data from the graph below shows that when wind generation was down during Q1 2023, the wholesale cost of power was generally higher. This common trend emphasises the importance of wind generation on the Irish power grid.
- Outages month-on-month were lower than the previous two March periods.
- The average outages for Q1 2023 also came in lower than the same Quarter in both 2022 and 2021.
Forecasts – Power Forward Prices
- Forward prices continue to fall consistently in Q1, bringing hope of a more manageable year in power markets in 2023.
- A high level of risk premium will remain in energy markets in the short to medium term and some key factors keeping those prices are:
- Susceptibility of LNG to international supply & demand dynamics. Key here is potential for increased LNG demand from China.
- Potential for drought and other climate related events to have an impact in key areas such as Hydro and Nuclear power generation and exports.
- Uncertainty around new supply chain norms, since the removal of the majority of Russian pipeline gas from the European mix.
- Forward prices are now approximately 2.5x the previously accepted norms.
Pinergy Risk Matrix
We have compiled a list of the key factors we feel have the highest potential to influence power prices over the coming 12 months and rated as follows:
Green = Price reducing impact and highly probable.
Amber = Risk of increased power prices and of lower concern.
Red = Significant risk to 12 month forward price outlook, with medium to high probability.