This week: Pause on crucial gas pipeline and high Day Ahead prices

Market Pulse

German energy regulator announces ‘pause’ on Nord Stream 2 approval

Following Putin’s announcement that there would be an increased gas flow to Europe,  the market experienced a steady but substantial reduction in gas, power and carbon prices. However, on Tuesday, the German energy regulator said it would not continue its approval process of the pipeline (currently registered in Switzerland) until ‘the operator is organised in a legal shape compliant with German law’. This would involve transferring its operational base to its German subsidiary. Although the general consensus is that this is a momentary pause as opposed to a major stumbling block, slight delays like this always lead to debate amongst world leaders as to the potential geopolitical danger this pipeline could create. The duration of this delay is open to debate, but front quarter prices seem to have been affected the most. Weather and temperature forecasts suggest both a prolonged big drop in temperature and a decrease in wind over the coming weeks, adding further upward pressure on prices.

As a result of these announcements, the energy markets across Europe reacted,  front quarter gas prices increased by ~25% between Monday and Wednesday increasing from 199p/therm to 245p/therm, and then an adjustment back to 222p/therm.

Power prices and Carbon prices were also dragged upwards due to the spike from gas, with front quarter power jumping £45/MWh this week and UKAs increasing by £4.60/mt since the beginning of last week. These jumps are due to a looming gas and, by proxy, energy crisis (as a result of a bounce back of demand from Covid-19) as well as the cold start to the year and consistent lower than average wind generation. However, prices are still below the record levels seen earlier in September.

Stagnant wind sees Day Ahead prices reach above £2,000/MWh

Recently, the market has experienced very calm prompt markets as wind generation has been averaging slightly over 8GW for the past month. However, on Tuesday  wind dropped below 1GW and a resultant spike in Day Ahead prices occurred, with N2EX peaking above £2,000/MWh and EPEX peaking above £1,600/MWh. As a result, the majority of assets were already on physical notification to take advantage of these market conditions and secure these high prices. This meant that the system had a healthy enough generation stack, further benefiting from higher than forecast wind and considerably lower than forecast demand which meant Intra Day prices were significantly lower than Day Ahead. Some players would have taken a risk on this, withholding their capacity from Day Ahead in a hope to pick up even higher prices in the balancing mechanism. In this instance, this strategy would have seen heavily reduced returns as can be seen in the graph. Wind generation had ramped up to over 10GW by Tuesday evening, and as a result the market experienced suppressed prices.