Market distortions of the past months

A few months ago, when electricity prices reached an all-time high of EUR 1,000 per MWh, many analysts spoke of a ‘black swan’: a rare, extremely improbable and totally unexpected event. The chart in this article illustrates how a whole series of extraordinary, mostly unforeseen developments coincided, causing unprecedented price fluctuations on  the energy markets.

Two major price shocks occurred between October 2021 and March 2022 (i.e. in the first half of fiscal 2021/22). First of all, a cold winter, low generation volumes from wind and hydro power, higher demand resulting from the economic recovery in the wake of the pandemic, the closure of more than half of Germany’s remaining nuclear plants and the discovery of corrosion in French nuclear reactors significantly pushed prices up at the end of 2021.

A second shock followed when Russia’s invasion of Ukraine led to sanctions against the aggressor, including oil and coal embargoes. This combination of events sparked massive fluctuations in gas, coal and electricity prices. At times, prices were six times higher than they had been 12 months previously, and this in the midst of a global energy transition. However, that was just the beginning.

Energy prices rose exponentially between April and September 2022 (i.e. in the second half of fiscal 2021/22). This was a situation unlike any seen before, and a number of factors were at work: the restricted availability of multiple French nuclear plants, which were operating at only 50% of capacity; the dry summer, as a result of which Swiss hydro production was below average; the reduction in the flow of gas via the Nord Stream 1 pipeline to 40%; and later Russia stopping its supply of gas to Europe completely.

This led to a run on alternative liquefied natural gas and coal suppliers to make up for the lost 140 billion cubic metres of Russian gas – around a third of Europe’s annual consumption. Since the revision of the Leibstadt nuclear plant, which is vital to Swiss energy supply security, took longer than expected, Axpo also had to buy in electricity at exceptionally high market prices to offset the production shortfall. 

With prices higher than ever and volatility persisting at the end of the summer, much higher collateral payments were needed in the wholesale business. Experts estimated that Europe’s electricity producers had to provide a staggering total of some EUR 1 trillion in additional collateral in order to stay in business. Against this incredibly challenging backdrop, governments throughout Europe approved state-supported loans and aid packages totalling around EUR 500 billion to help companies overcome liquidity squeezes and assist households in paying their electricity bills.

Energy prices fell in the second half of September thanks to unusually mild temperatures, high gas inventories and the various government measures. Nevertheless, the short-term outlook is uncertain. Prices can be expected to remain volatile over the medium to long term, and future trends will be harder to foresee. Since no end to the war in Ukraine is in sight, Europe continues to face a huge challenge in terms of restocking gas supplies for the coming winters.