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    European power prices remain elevated while blackout looms in California [GGP]

Summary

Highest all-time power prices in Europe are not expected to ease without government intervention.

by: Rystad Energy

Posted in:

Complimentary, Natural Gas & LNG News, Europe, Global Gas Perspectives, Political, Infrastructure, News By Country, EU

European power prices remain elevated while blackout looms in California [GGP]

While August power prices were the highest of all-time in Europe, the EU is considering passing legislation to curb the effects on consumers.

Peak power prices were recorded as high as €1,500 per megawatt-hour; prices such as this are not sustainable.

Austria has already announced a price cap, which could help consumers to afford power prices but could simultaneously disincentivize producers from generating essential electricity.

According to a recent leak, the EU’s plans are threefold: to reduce power demand, to introduce price caps, and to use revenue from the price caps to lower costs for targeted consumers.

Reducing demand from gas and power is one of the best methods of reducing prices and easing the power crunch, since supply would not be as stretched thin.

The EU has already have committed to reducing gas demand by 15%, however winter heating in Europe primarily comes from one of two sources, gas or electricity.

Reducing demand from both will potentially make it harder for Europeans to stay warm this winter.

However, the expected energy deficit may be avoided if Europe manages to reduce energy consumption from electricity by 13.5 TWh this winter.

Price caps can be damaging to essential generators using natural gas, since they cannot make a profit. However, the price caps in the leak appear to be aimed at low-marginal-cost producers (solar, nuclear, hydro, etc.), since they make large windfall profits from the higher power prices.

The money made from the price caps are planned to be used to ease tariffs on consumers.

This, in practice, should allow all producers to make a profit while also giving consumers a break on costs.

With Europe trying to steer away from gas, other sources, such as nuclear, start to seem more appealing by the day.

Germany, under much stress to keep energy security, has decided to keep two of its remaining nuclear power plants operational: Neckarwestheim and Isar 2.

The two plants should remain as reserve until April 2023.

They will not be expected to run unless necessary, however.

These two plants will give Germany an additional 2,900 MW of non-gas reserve capacity, enough to supply two TWh of energy within one month.

The European Commission is expected to decide on Friday on the measures that will be taken to help reduce the impact of the current energy crisis for end consumers.

This is likely to curtail the movement in both the power and gas markets as utilities and traders are seeking more clarity on the decided measures rather than making speculative trades.

The most likely solutions are pointing in the direction of price caps which could help limit to some extent the volatility in the market, but any intervention could have a negative impact in the medium-term.

A cap on Russian gas prices for example could be counterproductive as this could lead Russia to cement its halt on all gas exports to Europe, thereby further limiting the availability of gas for the power sector.

On the other hand, the Norwegian government has recently expressed their intention to help the EU by continuing with power exports and by limiting the price of exported natural gas.

This could provide some relief to European buyers, but the actual delivery of higher electricity exports is yet to be seen.

Norway’s southern region is struggling with low hydro levels and high prices and should the situation deteriorate over the course of the winter, the Norwegian government could change its mind and consider again power export rationing.

 

North America - California heatwave continues to present risk of blackouts.

The heatwave that had started in California last week is still ongoing, and several decades-old temperature records were hit throughout the state.

The state grid operator, CAISO, has issued a Flex Alert each day since last Wednesday up to today.

The US National Weather Service has issued excessive heat warnings throughout the state from now until end-of-day September 8.

CAISO forecasted capacity does not meet forecasted demand plus reserves during peak hours for today or Thursday; the same was true for the last three days. This will bring increased power prices and higher chances of blackouts.

Some localized heat-related blackouts occurred over the last days, but Californian utilities had workers on standby to quickly fix the issues.

California day-ahead peak power prices hit another summer high, with San Diego Gas and Electric prices hitting over the $900 per MWh for the peak hours Monday and over $1,200 per MWh Tuesday. Today the day-ahead prices rose again to above $1,300 per MWh.

The prices today are by far the highest California has experienced in the summer in the last decade.

Yesterday was the first day that CAISO issued a warning that they would initiate blackouts if needed. Fortunately, CAISO said they did not need to invoke this. It is likely that they will do the same tonight.

On Thursday last week, the California Senate voted to keep Diablo Canyon Nuclear Plant operating for at least five more years. This would help in future instances of extreme heat-related events.

Californian heat waves are likely to get more intense in the coming years, and so a large investment in installed capacity would be beneficial for the state to avoid blackouts.

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.