Quarterly market reports confirm globalised nature of gas market imbalance

Wholesale gas prices in Europe already experienced a significant rise in the second quarter of 2021, as demand increased – relative to the particularly lower levels seen at the same stage in 2020 –according to the latest Commission quarterly reports on gas and electricity markets published today. However, the real surge that caused the difficulties seen on EU energy markets this autumn only came in the third quarter, the report signals. The Commission has responded to the price surge by publishing a toolbox of options open to Member States under existing EU rules to address the impact on the market and on end-users. At the same stage, the new electricity market report notes that electricity consumption in the second quarter returned very close to close to pre-pandemic levels, driven by a recovery of economic and social activity, as COVID lockdown measures eased in most parts of Europe.

The quarterly gas market report outlines the marked rise in wholesale prices from 19 €/MWh at the beginning of the quarter to 35 €/MWh by the end of June. But August and September saw the average spot wholesale price soar to new record levels of 70-80€/MWh.

Global LNG markets had a significant impact on European wholesale prices, predominantly driven by LNG demand in Asia and sluggish recovery in supply at several big producers, aggravated by increasing cargo freights. In Europe decreasing gas inflows from Norway in Q2 2021, as infrastructure maintenance was carried out slightly earlier than usual, also contributed to the slow pace of injection of gas storages. At the end of June 2021, the EU average gas storage filling rate was only 48%, the lowest in a decade at this time of the year and down by 33 percentage points compared to 2020. The behaviour of the Russian pipeline gas supplier, booking less interconnector capacities than expected, which implied lower imports for the forthcoming period, also added to the tightness of the market over the summer months.

EU gas consumption in Q2 2021 was up by 19% year-on-year – relative to a low base in the same period in 2020 with the onset of Covid restrictions. Demand was driven by the cold weather in April-May 2021 and increasing use of gas in power generation, amid faster than expected economic recovery in the EU. Indigenous gas production kept on decreasing in the EU year-on-year (-8%), whereas imports rose by 7%, and LNG imports were up by only 1%.

Spot gas prices in Q2 2021 were up by around 30-40% compared to the first quarter of 2021, and year-on-year they showed three-to-five fold increases. Retail gas prices for households showed an increase of 7.5% year-on-year in Q2 2021. More significant increases are expected in retail contracts in the next quarters ahead, the report warns.

The quarterly electricity market report highlights how consumption picked up as the pandemic restrictions were eased through much of the continent. EU-wide consumption increased by 11% year-on-year in Q2 2021, thanks to recovering industrial and labour activity. Heating and cooling demand also influenced the rise in demand during the quarter. Nonetheless, power demand was still slightly below 2019 levels (-0.5%). The report also shows that demand for electrically chargeable vehicles (ECVs) continued to rise significantly – with more than 450,000 new ECVs registered in the EU from April to June 2021 – some 245% higher than the same period in 2020.

A sharp increase in commodity prices (mainly gas, coal, and to a lower extent CO2) combined with increased power demand linked to the economic recovery and temperature fluctuations in Europe drove prices to 13-year highs in many European markets. The European Power Benchmark averaged 68 €/MWh in Q2 2021 – equivalent to 158% higher than Q2 2020 and 58% up on the same period in 2019.

The share of renewables in the energy mix managed to reach 42% in the second quarter, beating fossil fuels (32%) – with an increase of 11% in solar generation (+6 TWh), 7% of wind (+5 TWh) and 7% biomass (+2 TWh) on a yearly basis. Low levels of electricity demand during the first lockdown of 2020, amplified the comparative increase in fossil fuel generation during the quarter. Coal and lignite generation rose by 29% (+17 TWh). High gas prices reversed coal-to-gas switching in most markets during the quarter. Despite increasing prices, gas-fired generation saw its output grow by 9% (+10 TWh), while nuclear output registered an increase of 11% (+16 TWh).

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