European energy markets face persistent challenges in 2025

If one were to compare European wholesale energy prices between 2023 and 2024, a noticeable decline would be evident, driven by several bearish fundamental drivers. Notably, French nuclear output has significantly increased from 2023 levels. Combined with exceptional hydropower production, this has enabled France’s net power exports to reach a 22-year high, despite persistent challenges from frequently reduced available transfer capacity to neighbouring markets. Meanwhile, the large-scale integration of renewable energy sources continued across the continent, with solar power generation increasing by 20 per cent year-on-year, contributing to a record number of negative power prices across Europe. Additionally, sluggish demand recovery has further weighed on European energy and carbon prices.

Mild weather conditions during the 2023/24 winter significantly influenced the region’s energy price regime by limiting withdrawals from gas inventories. This facilitated the replenishment process and exerted downward pressure initially on gas and subsequently on carbon, coal and electricity prices. However, in the second half of the year, the LNG market tightened due to intense competition between Europe and Asia. This was exacerbated by delays in new projects and led to elevated prices. Additionally, a colder end to 2024 compared with the previous two years, along with slower LNG imports, pushed European gas inventories below the five-year average. Finally, the expiration of the Ukrainian gas transit agreement at the end of December reduced Russian pipeline supply. This reduction, along with unplanned outages at major suppliers, forces Europe to intensify its competition with Asia in the global LNG market to secure large volumes of LNG imports and meet its official storage target of 90 per cent capacity by November 2025. 

On the geopolitical front, escalating conflicts in the Middle East also intensified supply concerns during the closing months of 2024, with markets actively seeking clarity on potential threats. Meanwhile, markets are bracing for the implications of the second Trump administration in the US, set to begin on 20th January, with a focus on policies such as trade tariffs on China, potential sanctions on Iranian oil, new offshore drilling initiatives, and political intervention in the Russian/Ukrainian conflict. In addition, political uncertainty is mounting in Europe as regional elections are scheduled next month in Germany, following the government’s collapse last November. This potential turmoil further complicates energy strategies, delaying the construction of 10.5 GW of new hydrogen-ready gas-fired power plants and challenging the 2030 goal for coal phase-out. These developments are particularly significant for the broader European energy market, given Germany’s pivotal role in the EU’s economy and its influence on the financial electricity market.

Considering all the aforementioned developments, we expect an eventful 2024 to be followed by another eventful year, marked by unpredictable geopolitical events, political shifts and guidance, macroeconomic uncertainty, and variable weather conditions, all of which will contribute to maintaining high levels of energy price volatility throughout 2025.