Drought and heat drive European electricity prices to all-time highs

Drought and heat have pushed European benchmark electricity prices to all-time highs on August 2, 2022. As a result, countries are relying even more on Russian gas to meet increased power demand instead of storing it for the coming winter season, as recently agreed in Brussels.

On the European Energy Exchange AG, German power for next year advanced as much as 5.4% to a record 405 euros ($414.56) per megawatt-hour before trimming gains. Equivalent contracts for French power reached a new high, rising as much as 2.8% to 522 euros ($530.76).¹

Month-ahead prices in Germany and France advanced as well, gaining as much as 4.2 and 1.5%, respectively.

“Germany 1-year forward baseload electricity surges >€400 per MWh for the first time ever. We are truly into crunching territory for the country’s energy-intensive manufacturing industry,” energy and commodities columnist at Bloomberg, Javier Blas, said.

“The current price is ~1,000% higher than the €41.1 per MWh 2010-2020 average.”

While grain shipments from Ukraine are straining the rail network, low water levels are hampering inland shipping through rivers, forcing ships to carry only half their capacity.²

German energy utility EnBW said coal shipments have already been affected by low water levels on the Rhine River – the most important shipping lane in Europe and one of the most important in the world.

All rivers across central Europe are at unusually low levels, but Rhine – crucial for shipping of goods within the continent – is set to fall perilously close to the point at which it would effectively close, putting the trade of huge quantities of goods at risk as the continent seeks to stave off an economic crisis.³

According to Germany’s coal importers association, coal transport bottlenecks are expected to increase, especially from September when monthly import volumes are expected to rise significantly.

Falling water levels are exacerbating the European energy crisis, Blas noted on July 13:

“As households and businesses turn on their air conditioners, electricity demand has jumped and wholesale power prices have surged. But far more concerning — and far less discussed — is the drought spreading from Germany to Portugal that has the potential to worsen the current energy crisis for a lot longer than the current hot spell.

“The drought is a gift from nature for Vladimir Putin, making Europe even more reliant on Russian natural gas at a time when the Kremlin is reducing supply sharply. Last winter, the weather favored Europe, as unseasonably high temperatures during the Christmas holidays cut demand for energy; now, the lack of rain is working against the continent.”⁴

After having the driest July on record, France is bracing for more high temperatures this week with temperatures expecting to peak at about 40 °C (104 °F) in parts of the south on Wednesday, August 3.

This will further raise river temperatures, threatening the ability to cool the country’s already stressed nuclear power plants.¹

While France is typically a power exporter, its nuclear output, which accounted for 69% of the country’s electricity production in 2021, is set to fall to a three-decade low this year and will not fully recover until 2023.

References:

¹ European Power Hits Record as Extreme Heat, Drought Parch Europe – Bloomberg – August 2, 2022

² Back to black? Germany’s coal power plan hits hurdles – Reuters – July 26, 2022

³ Europe’s Rhine River Is on the Brink of Effectively Closing – Bloomberg – August 2, 2022

⁴ Europe’s Heat Wave Is Bad for Energy Prices, But the Drought Is Worse – Bloomberg – July 13, 2022

Featured image credit: C.H. aus B. (stillshot)