California’s duck curve* visits Europe

European energy markets continued reverting to pre-pandemic levels during April amid strong inventories, persistently subdued demand and, in most cases, high global supply. However, testing some of Europe’s lowest prices in almost two years does not necessarily mean that Europe’s gas crisis is over, nor that markets went unchallenged over the course of April. On the contrary, developments such as prolonged strikes in France during the maintenance period for its nuclear reactors, along with cold spells in early April, supported the risk premium and proved that any return to the new ‘normal’ is not only a matter of time but also a combination of several fundamental drivers.

Persistently subdued demand, the Easter effect, the improvement in hydro balances and, most importantly, the seasonal increase of solar load factors during April drove peak power prices downwards. While an inversion of the usual peak premium over baseload pricing is nothing new, the scale of that inversion in the Netherlands last month and the depth of negative pricing have reached new levels. This is already reflected in summer contracts, such as the Q3-23 peak-baseload spread in the Netherlands, which this week closed at -5.5 EUR/MWh. The expansion of behind-the-meter solar has been among the key drivers of this inversion, with countries like Spain doubling their installation of solar capacity from prosumers within the last two years. Power demand is another underlying driver, which is still approximately 6% below its five-year average in several markets, and is expected to introduce negative peak-baseload spreads more often during the coming summer. 

Seasonally weakening European power demand, improved nuclear availability in France, and healthy precipitation – coupled with the aforementioned higher solar load factors – raised hydro stocks in most markets and helped to erode risk premium. In France, labour strikes against state pension reforms initially constrained nuclear availability at numerous reactors and delayed the maintenance schedule, thus building risk premium in French winter power contracts. However, with France’s nuclear authority ASN approving later EDF plans to inspect repaired welds during regular maintenance, the Q1-24 baseload forward contract dropped by around 100 EUR/MWh within a week. Relative to its neighbours, German prices this summer are supported by the final closure of the German nuclear fleet, while in Finland the Olkiluoto 3 reactor started commercial operation after a 14-year delay.

On the fuels side, near-term gas prices plunged as strong global supplies and ongoing subdued demand in Asia allowed European LNG imports to remain incredibly strong. Persistently lacklustre coal demand in Europe and parts of Asia was also the main reason for coal prices remaining low, with cost levels suggesting further limited downside.

*The duck curve is a graph of power production over the course of a day that shows the timing imbalance between peak demand and solar power generation.

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