In what continues to be a particularly tumultuous period for the wholesale energy market in the lead up to Christmas, prices have continued their crusade of setting record highs in a final send-off to 2021.
On Wednesday 22 December, day-ahead gas prices reached a new all-time record high (on our records) at 415p/th beating the previous high set on our records just a day earlier at 408p/th, continuing the trend of unprecedented prices as we soon enter the final week of the year. For context, day-ahead gas prices at the same time in 2020 were ~765% lower.
A similar trajectory has been observed for near-term power prices too. Day-ahead power prices in December have rallied, taking direction from the landmark gains seen in near-term gas contracts, with day-ahead baseload power averaging ~£290/MWh in December so far – this compares to an average of £59/MWh during the same period in 2020. It is prudent to highlight in 2020, however, due to lockdown restrictions at the time, demand and typical system usage was slightly lower than we would ordinarily expect to see.
Whilst the immediate picture for wholesale energy prices remains at exceptionally high levels, it is slightly further along the forward curve into 2022 which provides perhaps the most eye-catching price levels. On the power side, front-month contracts have seen borderline exponential growth in the last week. The January 2022 Power contract has averaged £530/MWh since Monday 20 December, reaching its latest high on 22 December at £575/MWh, a trend shared with the February 22 power contract, reaching a staggering £600/MWh on the same day.
With National Grid ESO previously pointing to tighter supply margins expected for this winter in its Winter Outlook report, it is looking like we are set to see significantly elevated levels of pricing continue into the start of 2022.
Why are prices so high? Amid already relatively tight gas and power supply pictures, we have seen the continuation and introduction of numerous bullish market fundamentals to catapult prices to new highs over recent days.
Some of the long-standing bullish fundamentals of 2021 remain unchanged, which have provided a strong bedrock of price support over recent months. Namely, sustained low levels of gas in European storage facilities, well below 2020 volumes, anywhere between 15-20pp based on our recent observations. We have recently seen that the Nord Stream 2 gas pipeline connecting Russia to Germany and mainland Europe could remain idle as late as September 2022, compounding gas supply uncertainty in Europe. We have also seen untimely unplanned gas production outages on the Norwegian Continental Shelf (NCS), tightening already strained supply into the UK, with the Troll gas field temporarily unavailable to name one example as well as outages at our own indigenous sites in Barrow North and Bacton SEAL.
Interconnected power supply has also been impacted entering the winter period. A fault was detected on the North-Sea Link between the UK and Norway while IFA1 continues to experience a prolonged outage, expected to remain partially offline until March next year. To exacerbate the relatively tight electricity supply picture, France’s EDF had to take more nuclear reactors offline last week, after faults were found at its Civaux nuclear power station, with one other plant also shut down, understanding the second reactor was of a similar specification.
On the commodity front, UK ETS carbon prices have shared gains seen across gas and power markets. High price levels were sustained across September, October and November 2021 which exceeded the December 2021 Cost Containment Mechanism trigger price of £52.88/t for that period. Despite this, the UK ETS Authority have since decided they will not be taking action to increase supply, quoting: “the appropriate course of action is not to redistribute or release additional supply into the scheme’s market at this time”. We could expect to see prices continue at elevated levels into the new year as a result.
Whilst some of the aforementioned market conditions may be relatively temporary, we are set to enter 2022 with heavily elevated prices amid a continued tight European gas supply picture and tight power supply margins compared to recent winters. Regarding gas, some initial forecasts are suggesting European gas storage levels could reach their lowest levels since March 2018 (i.e., after the Beast from the East) by early April 2022. Low European gas storage levels have played a significant role in the rise of wholesale energy prices in 2021 and continued low levels may now have knock-on effects well into 2022.