Wholesale gas and electricity prices surge amid perfect storm of adverse news

Wholesale energy prices in the GB market and across Europe rose sharply on Tuesday amid a series of adverse developments affecting production and flows across the Continent. In France, news emerged of problems with components to a key supplier of equipment to EDF’s reactors, raising concerns over shutdowns to address the issues. In Brussels, the European Court of Justice (ECJ) overturned a previous ruling that had allowed Gazprom to utilise more than half of the capacity of the OPAL gas pipeline that connects Germany with the Russian-backed Nord Stream pipeline, potentially curtailing flows from the country. In the Netherlands, the Dutch government confirmed plans to formally cease production at the onshore Groningen gas field eighty years ahead of schedule in 2022, citing the potential for increased reliance on gas imports as an alternative.

The news, affecting gas and electricity volumes alike, saw October ’19 NBP natural gas prices increase by almost 20% day-on-day to 37.28p/th while the Winter ’19 contract rose by almost 15% to 46.03p/th, with support echoing across the longer-dated contracts. It was a similar story in the GB Baseload electricity market, as well as the EU carbon allowance market. Prompt contracts showed little overall movement, however, with most gains seen in the longer-dated periods.

EDF said in a statement that its reactor building unit Framatome – formerly known as Areva – had advised it that certain reactor components had “a deviation from technical standards”, specifically in terms of welding of reactor steam generators. Framatome, which was awarded a contract in November 2018 to modernise the instrumentation and control elements of EDF’s French reactor fleet as part of the company’s wider programme to extent the operational life of its assets, had confirmed the issue – which has now been referred to the French nuclear safety agency, the ASN. The group is expected to make an announcement on potential reactor closures in the coming days, according to newswire service Reuters, with any closures having the potential for reduced exports from and increased imports of electricity by France.

Press reports have indicated that the issue will affect reactors which have had their steam reactors (the components used to generate steam to power the reactor turbines) replaced since 2008, although there are no indications as to how much of the French reactor fleet this will impact. EDF’s UK operation has not commented on potential impacts to its reactors, although Framatome was not responsible for the construction of these facilities. However, this is the second high-profile issue experienced by EDF with Framatome-built components, following the closure in 2016 of around a third of EDF’s French reactors by the ASN after anomalies with the steel used in certain reactor elements.

The ECJ’s decision to overturn a previous ruling that allowed Gazprom to utilise more than 50% of the capacity of the OPAL pipeline is expected to lead to lead to a diversion of Russian gas through other pipelines to Europe in the short-term, although it may have longer-term consequences for the planned Nord Stream II pipeline and European reliance on Russian gas. In 2016, the EU removed a 2009-imposed limit on Gazprom’s use of the OPAL pipeline which had meant that the company could not use more than 50% of its 35 billion cubic meters (bcm) per annum capacity. Following the 2016 decision, Poland lodged an appeal with the ECJ on the grounds that the move violated the country’s energy security on the grounds that the increased use of OPAL allowed Russia to bypass Polish infrastructure.

In Tuesday’s ruling, the found that “the contested (2016) decision was adopted in breach of the principle of energy solidarity”, with the original 2009 limits set to be re-imposed. Gazprom has been able to utilise 100% of OPAL’s capacity since 2017, with the asset tying into the Nord Stream pipeline that delivers Russian gas to Germany. However, the ECJ ruling may now call into further question Russian plans to double the pipeline capacity of the existing 55 bcm per annum Nord Stream link through its twin asset, Nord Stream II. Both Polish and Ukrainian governments have expressed concern that any further expansion of Nord Stream could lead to less gas flowing through the pipeline links that cross their territories to deliver Russian gas to Europe, compromising their energy supply security.

News that the Dutch government would cease production at the Groningen field eight years ahead of schedule comes after several years of progressive scaling back of output from the asset due to fears over seismic instability. Groningen, which is Europe’s largest onshore gas field and the backbone of the Netherlands’ gas output, has been the subject of controversy since it emerged that extraction was deemed to be causing earthquakes in the region. Having produced over 54 bcm of gas in 2013, the most recent output cap for the field was 11.8 bcm for the twelve months to October 2020, and in January 2018 the Dutch government pledged to stop production from the field by 2030.

However, this timescale has now been accelerated such that production will cease in 2022, although the field will be maintained such that it can provide gas during the winter months through to 2026. In a statement, the Dutch government said that the early closure would be possible by means of increased reliance on imports and greater use of gas processing, as well as a growing switch by industrial users away from gas as a fuel.

While wholesale energy prices have been on a general downward trend in recent weeks, the combination of these developments has reversed almost a month’s worth of losses in a single day’s trading and highlights the continued uncertainty over the UK and Europe’s energy mix as the winter months appear on the horizon.

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