Surging renewables bring an optimism that summer will test

As the month of May came to a close so did the spring, a season which European energy markets navigated with great ease. Electricity prices continued to tumble during the month as strong renewable output and persistent demand destruction limited the call on thermal power generation. Fuel economics also contributed to the bearish market sentiment. Despite tightening fundamentals in the gas market due to ongoing maintenance outages, gas prices continued to ease amid abundant inventories, while coal and carbon prices followed the same downward trajectory.

Europe’s continued efforts to accelerate renewable growth yielded another month of high solar power generation, which in turn triggered a rising number of negative power prices across the continent. Hydro power production also surged on the back of increased snow melt in the Nordics and strong precipitation in the Alps, boosting total European renewable output and driving Nordic power prices below 38 EUR/MWh. While renewable energy admittedly contributes to lower power prices, discussions around the distribution of both its merits and disadvantages are expected to escalate. The debate reignited over the past few weeks in Germany, where those in the north argued in favour of the price zone split on the back of higher grid fees and renewable capacity, while the south opposed the measure citing potential harm to its industries. Meanwhile Südlink, one of the planned HVDC (High Voltage Direct Current) lines expected to facilitate the transport of cheap renewable energy from the north to the south, received its final approval and is expected to come online by 2028.

In the meantime, fuel markets continued looking for signs of demand rebound amid falling prices. On the gas side, heavy maintenance work ranging from Norway to Northern Africa, as well as weak flows via Turkstream and the Netherlands, did not prove sufficient to support prices. These plunged further, allowing gas generators to displace coal and lignite plants from the supply stack. However, persistent power demand destruction along with high renewable output did not leave space for high thermal generation, while industrial demand recovered only marginally despite the new low-price regime.

As a result, robust LNG supply enabled net injections into the already high storage inventories and increased the possibility of Europe heading into next winter with full gas storage. Within this framework, coal could not compete with cheaper and cleaner gas and saw consumption in May plummet by more than 60% year-on-year. Carbon prices also succumbed to the weak macroeconomic outlook and closed May about 6 EUR/MWh lower month-on-month. Looking further ahead, the winter forecast carries much uncertainty and risk, which will be defined to a large extent by how much energy demand will pick up over the coming months.

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