Winter analysis

12 October 2021

The energy crisis is on everyone’s lips, or at least those of the initiated. At COR-e we repeat (too much?) often that there is no magic wand to predict the future, nevertheless we like to take the risk, and in the unprecedented context of this year, we propose a special version of our “Winter Analysis” in two parts:

– A qualitative study, which will scan the different possible scenarios
– A quantitative study, which will put some of these scenarios to music, with the help of weather history

N.B.: we will only look at the wholesale markets here, deliberately leaving out the mechanisms put in place to reduce the impact of this crisis on the end consumer’s bill.

Gas

Gas is of course the main actor in this price surge which, let’s remember, had begun before the exponential rise of the last few weeks. As is often the case in such a sudden movement, a combination of factors accumulates and all it takes is a spark to ignite the fire:

– Historically low storage levels, after a rather cold winter in 2020/2021
– Strong Asian demand, diverting LNG cargoes from Europe
– Communication war with Moscow, which is blowing hot and cold on its willingness and ability to increase exports to Europe
– Low renewable production during the summer, having increased the demand for gas

The markets are therefore nervous, highly volatile, and very often the movements are exacerbated by credit events that force some players to close their positions in a hurry, or on the contrary to buy hedges “at any price”. The collapse of several suppliers in the UK is an example of this.

Supply seems to be assured at normal temperatures, with a little room for manoeuvre in case of cold weather. In any case.

Coal

With the sharp rise in gas prices, coal-based power generation has become more economical than gas-based power generation, leading to a sharp increase in demand. Market prices naturally followed the gas prices to reach historical highs.

CO2

Having risen for several months, which had allowed coal plants to be gradually removed from the merit order (unfortunately this is not the case anymore…), CO2 is paradoxically the commodity that has remained the wisest during the recent market boom, fluctuating between €60 and €65/t.

Market fundamentals remain solid, with strong confidence in the political will at the European level to use the ETS mechanism as a signal for decarbonisation.

What about power in all this? Move along, there's nothing to see!

Behind this joke, a quasi-reality is hidden, this crisis is a gas crisis, which impacts electricity prices, but it is not a crisis of the supply/demand balance which would be synonymous with tensions on the systems.

To sum up, the destiny of the price of electricity is therefore in that of gas, at least for this winter 2021-2022.

At the beginning of 2022, the withdrawal of certain production capacities in Germany will undoubtedly create some tensions, in particular in the event of low renewable production. Germany might have more difficulties in exporting to its neighbouring countries than in previous winters.

There is a lot of talk lately about low wind production in Europe in 2021, which is an undeniable fact, but we will be careful not to make extrapolations for the near future and to link this situation to climate change.

After these qualitative explanations, what can we expect in concrete terms? Here we will take the risk of developing a few scenarios. Specifically, we will replay the last 10 winters (November to March): we will use the observed weather, and apply renewable capacity, power plant availability and current fuel prices.

What are the conclusions?

– In the absence of major contingencies on the generation fleet, and despite significant exports to the UK, and a likely decrease in imports from Germany, electricity supply in France should be secure, even at below normal temperatures.

– In a scenario similar to that of winter 2012, France will however not avoid some price peaks on the spot markets.

– The range of differences between the different scenarios is very large. For example, for the month of February, our worst case scenario, based on 2012 weather, forecasts a price of 290 €/MWh, while the best case scenario, based on 2014 weather, forecasts a price of 245 €/MWh.

Below is a graphical representation of our scenarios for the winter of 2021-2022 (November to March).
Disclaimer : this simulation has been done with gas prices as of Monday 11th close.

Do not hesitate to contact us to build customised scenarios (decrease or increase in gas price, for example) around these weather scenarios.

Emeric de Vigan
CEO & Founder, COR-e

Winter analysis

Gas

Coal

CO2

What about power in all this? Move along, there's nothing to see!

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