Breaking EUR 100/MWh: The power price bull run

This blogpost is authored by a member of Montel's content marketing team.

Last week, German power prices for delivery on August 11th settled at EUR 100.76/MWh, whilst Spain’s baseload for the same day settled at EUR 113.99/MWh, beating the previous day’s record. There is no single driver forcing power prices up to these levels, and instead we are seeing a number of separate but coincidental pressures across carbon, gas and coal.

Lower levels of renewable generation (wind in Germany for example) has also played a part here, along with an international rebound in demand as we begin the recovery - such as it is – from the COVID-19 pandemic. The rally associated with demand recovery was expected, but the extent of it has surprised even the most optimistic estimates from this time last year.

Understandably, a reduction in power prices is now expected into 2022, but before that, Europe still has to navigate the coming winter, with a tight situation on gas following disappointing flows this year meaning that stocks may not have been replenished to expected levels. With bidding for LNG cargoes competitive across the globe, this will no doubt continue to support power prices into the coming season.

Our most recent Montel Weekly podcast also detailed how the more stringent carbon scheme in Europe is now the main driver for soaring carbon prices - and despite that the movement in coal is astonishing. Taking a rough global average from last year, prices fell to somewhere near $50 per tonne, but if you now look at the Newcastle contract for delivery in Sep-2021 (below) it’s more than tripled in value since then to just under $170 per tonne.

Despite that, coal fired generation in Germany is up 38% in H1 2021 - and whilst that is a notable jump from what we saw last year due to the demand destruction caused by national lockdowns - we still won’t be returning to 2019 levels of coal-fired generation, owing to policy announcements ensuring the phase out of coal over the next few years.

As fossil fuels continue to be displaced over time with the advent of battery storage, hydrogen and increasing amounts of renewable generation across the European energy mix as these technology types achieve grid parity, power markets will of course change and adapt to new drivers, though we can expect gas and carbon to remain significant influences for some time to come.

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