EDITORIAL: Energy Market

vom 2. April 2024

European electricity demand set to increase in 2024; slightly above 2023 level / Trend of price reductions to continue in coming years – industry expert Dimitrios Koranis

Changes in the drivers of the energy market (supply and demand) have always determined price developments. External interventions, e.g. through political will or non-market events such as a quarantine or war, influence normal market development, disregard fundamental data and framework conditions, and generate a new “normalcy”.

One of the most significant changes, also in 2023, was the development of demand. In most European countries, except Norway and Denmark, measured demand in 2023 was lower than in 2022. Countries with the highest demand (Germany with approximately 460 TWh, ahead of France with approx. 430 TWh) recorded a decline of about 4-5%. Compared with the pre-pandemic period, this is 8-9% less. Countries that follow and are significant demand markets, such as Italy and Spain, also recorded declines, although the long-term decline (2023 to pre-pandemic) was only 6%. Scandinavian countries such as Norway and Sweden, meanwhile, recorded a sideways movement or a small increase (Norway and Denmark) in 2023 compared with 2022.

On the one hand, the decline in demand has affected prices (decline in 2023 compared with 2022 by approx. 50%). On the other hand, the low prices and the outlook for further reductions have provided little impetus on the demand side for an economic upturn. The indirect burdens on energy prices remain too high.

Electricity: trend outlook

The change in the industrial landscape and its demand trend in various sectors, coupled with necessary energy efficiency measures because of the energy crisis in 2022, noticeably shifted demand requirements in the peak hours of 10 am-6 pm. However, there are also country-specific peculiarities here. For example, the increase in integrated solar energy in countries such as mainly Spain, but proportionately also Italy, has led to a much sharper decline in electricity demand during sunshine hours.

In the Nordic countries – Norway in particular – however, there has been an increase in demand, which is slightly higher than in the pre-pandemic years (approx. 130 TWh). Of note here is the increased demand outside peak times, such as for charging electric vehicles.

It can be assumed that with increasing electrification, demand in 2024 is set to increase compared with last year, and will be slightly above the 2023 level. A stimulating positive economic trend would also result in a surge in demand for energy. Such a development would tend to drive prices upwards or at best maintain the current level, depending on how supply develops.

On the supply side of electricity, Germany, France, and the UK are regarded as key players in the market. This core group is complemented by Italy, Spain, and Poland. Together, these countries account for around 70% of the European market. The Netherlands and Belgium also have a significant influence due to technology, and the raw material gas as an energy source.

Renewable energy, the way forward

In stock-market jargon, the situation and outlook would be described as bearish. The trend of energy price reductions appears to be continuing. Although demand is expected to grow moderately, the sources of renewable energy are also increasing. Absolute capacity is expected to continue rising. The utilisation and contribution of generated green energy (primarily wind and solar) is also expected to increase due to weather and seasonal factors.

The shutdown or curtailment of individual coal and hard-coal-fired power plants during the summer are likely to affect supply, but should be easily compensated for by sufficient renewable generation. Nevertheless, turbulence may occur during this phase (summer 2024) contrary to the market trend, resulting in “low” to “hardly noticeable” price reductions. In an unfavourable scenario – a significantly higher surge in demand than expected plus unfavourable weather conditions – there could even be price increases in the summer. This could also turn the market temporarily bullish.

Gas prices expected to fall further

The gas market could tip the scales. This has already turned into a bear market in the winter with significant price reductions; much more than could have been predicted at the beginning of winter. This shows how much fear and uncertainty had still been looming over prices. However, a very high supply – at unfortunately expensive starting costs (imported LNG gas vs. continuously flowing pipeline gas) – coupled with a mild winter led to high inventories and availability. The mere fact that gas storage levels in Northwest Europe will be just over 50% at the end of the heating period (end of March) is very good news – also with an eye on the future.

The high availability of gas coupled with the typical drop in demand during the spring/summer phase is expected to cause prices to fall further. Experts assume that there will also be a breakthrough of EUR 20/MWh during this period and that there will be at least temporary prices of less than EUR 20/MWh on the spot market. This price level could compensate for the potential bull trend in the electricity sector.

A look at futures in various European countries shows a uniform direction, albeit at different levels. Looking at 2024, futures prices in Germany are higher than in France or the Netherlands. While prices in Germany for Q3 and Q4 are between EUR 70-83/MWh, in France they are between EUR 58-80/MWh, and in the Netherlands between EUR 61-78/MWh.

The further we look into the future (2025-2027), however, the closer the prices are in the respective countries. This is a possible indication that external influences are declining, and only internal market influences are playing a role. We also expect the price reduction trend to continue in the coming years.

Autor: Dimitrios Koranis

published on 28.03.2024 at PIE (Plastic Information Europe)