European Power Prices Tumble as EU Authorities Plan to Avert an Energy Crisis

The Industrial Park of Hoechst in Frankfurt, Germany, on June 23, 2022. Germany is activating an emergency plan for natural gas supplies to ward off a crisis this coming winter. (Michael Probst/AP Photo)

European benchmark energy prices have plunged by nearly half over the last three days, after news that European Union (EU) policymakers will intervene in an attempt to ease natural gas shortages.

German 12-month energy futures on the European Energy Exchange fell as much as 54 percent from their peak at the beginning of the week, from €1,000 per megawatt-hour to as low as €486 per megawatt-hour on Sept. 1.

However, current energy prices are still at least 10 times the seasonal average, as elevated prices and market volatility have forced many traders to pump in additional cash to back their positions, reducing liquidity.

News that the EU will do more to lower prices put the market in a bearish mood.

“The expected EU intervention in the market to curb prices has been interpreted very bearishly, even though there is still a lot of uncertainty surrounding what initiatives the EU will take and how they will look in detail,” said analysts at Energi Danmark in a note.

Sanctions on Russia over its invasion of Ukraine have led to a shortage of natural gas supplies in the EU, causing power prices to hit new records over several months, leading to hardship for millions of its citizens.

Russia’s Gazprom, the majority state-owned energy company, stopped the flow of gas through the Nord Stream 1 pipeline to Europe on Aug. 31, citing maintenance issues, which has caused much concern over the reliability of future winter energy supplies.

The Baltic sea pipeline is the key supplier of natural gas to the EU.

European Commission Looks to Consumption Cuts

“The situation remains very, very critical,” said Mechthild Woersdoerfer, a senior energy official at the European Commission, during a conference.

“There is a risk of disruption which is very strong, even getting stronger, as already half of our member states are affected totally or partially.”

The European Commission said it will take various additional measures to intervene in the energy market in order to avert a winter crisis and a continent-wide recession.

“There is work on emergency measures on electricity prices. There might be also something on demand reduction for electricity,” said Woersdoerfer.

EU leaders are looking at several options to alleviate energy prices, such as instituting price cuts and mandatory reductions in electricity demand, as part of its intended strategy.

Woersdoerfer suggested that a windfall tax on generators should be considered by authorities.

Germany, Europe’s largest economy, is particularly dependent on natural gas and is witnessing the reduction in industrial output and shortages of essential fertilizers.

Winter Is Coming

Meanwhile, the energy-intensive “heating season,” which usually starts around mid-September, is a deadline for German authorities, when stored gas will be needed the most.

The German government, like those in other EU countries, has been stocking up gas storage facilities to prepare for what is expected to be a very cold winter, said Robert Habeck, Germany’s economy and climate minister.

Gas storage facilities in Germany were just over 83 percent full on Aug. 30.

The government’s target is 85 percent by Oct. 1, but its goal of 95 percent capacity can be reached only if industries and households cut about 15 percent of usage, according to Bundesnetzagentur, Germany’s energy regulator.

The EU’s target is for gas storage to reach 80 percent capacity throughout the bloc by Nov. 1, and many gas storage facilities have already reached 80 percent full capacity.

“Strong LNG and non-Russian pipeline imports have helped get Europe gas storage levels to 80 percent at the end of August, beating expectations,” said Massimo Di Odoardo, vice president for gas and liquefied natural gas (LNG) research for Wood Mackenzie, to Bloomberg.

“We expect this to rise to 86 percent by the beginning of October.”

A colder-than-average winter and further cuts to Russian gas supplies could make the tight situation worse.

The energy markets are waiting to see if Gazprom will return the Nord Stream 1 pipeline back to service after its three-day maintenance shutdown.

“If Russian flows from Nord Stream resume at current levels following the three-day maintenance in September, Europe could be in a position to get through this and next winter without demand curtailments,” said Di Odoardo.

Meanwhile, European Commission President Ursula von der Leyen will outline the EU’s plans on how the bloc will cap energy prices in a speech on Sept. 14.