European power prices reach all-time highs amid soaring wholesale gas costs
European power prices have reached all-time highs of €180 per megawatt-hour(MWh), according to Morningstar’s Utilities Observer report.
The research points to soaring wholesale gas costs, the jump in carbon allowance prices, and the tightening of the reserve margin for the latest peaks in power prices across the continent.
Wholesale gas costs have risen five-fold this year, been driven by a rebound in global demand and depletion of European storage after a cold 2021 winter.
Gas prices have also contributed to the jump in carbon allowance prices, which have now risen to historic highs.
Meanwhile the reserve margin is set to tighten amid intermittent renewables growth following the closure of many European gas and coal power stations.
Ultimately, the research highlights the relationship between gas prices and overall power prices for consumers.
It forecasts power prices could decline if gas prices could decrease over the next couple of years due to easing Asian demand as local inventory levels normalise, and the commissioning of new U.S. liquefied natural gas terminals in 2023-24.
However, prices will rebound if the global gas market is undersupplied as Morningstar anticipates from 2027 due to sustained Chinese demand growth.
The report also reflects on CO2 emissions, forecasting that emissions covered by the EU’s emissions trading system such as combustion and industry will fall 31 per cent by the end of the decade
It expects CO2 prices will continue to be driven by the coal-to-gas switching price which Morningstar estimates at EUR 49 in the long run based on its gas and coal price estimates of €21/MWh and $78/ton, respectively.
Morningstar projects that combined-cycle gas turbines should remain the marginal source of electricity supply, meaning that power prices will have to cover CO2, gas, and variable operating and maintenance costs.
This would mean a long-term power price of €60/MWh.
Tancrède Fulop, senior equity analyst at Morningstar told Morning Wire gas prices will continue to influence power prices until renewable infrastructure has developed significantly, especially with coal and nuclear facilities being shut down across Europe.
He anticipated records would continue to be broken “if the current situation of perfect storm persists of cold temperatures, Russia not increasing its gas exports, low wind speeds and unplanned nuclear outages.”