Gas prices rise amid hot weather in Europe

Gas prices in Europe rise to the levels of the end of July amid the expectation of a new heat wave in the southern part of the continent this and next week. However, demand for air-conditioning power has not yet led to a significant increase in gas generation, as the peaks are mainly covered by RES, and overall energy demand remains weak due to slowdown in economic activity. So far, the decline in gas prices during the first half of the year has not led to a recovery in consumption in Europe, even though June and July were the hottest since at least 1940.

The cost of gas at the TTF hub in the Netherlands rose on August 8 by 2%, to €31 per 1 MWh ($358 per 1,000 cubic meters), rushing to local highs at the end of July, follows from the data of the ICE exchange. In mid-July and early August, gas prices fell to €25 per MWh, the lowest level since September 2021, amid high storage inventories. However, now expectations of hotter weather in southern Europe, already suffering from rising temperatures and fires this summer, are pushing prices higher. During hot weather, the demand for air-conditioning energy increases, which usually leads to an increase in the load of gas-fired power plants, which are technologically well suited to cover peak loads.

July, like June, was the hottest corresponding month on the planet since at least 1940, when detailed observations began, according to data from the European climate change watchdog Copernicus.

July was also the hottest month overall, with an average temperature of 16.95°C, surpassing the previous record in July 2019 of 16.63°C. However, demand for gas increased only modestly, as solar power plants (PV) took over most of the additional peak-hour production in southern Europe. So, according to Ember, in July, 24% of electricity generation in heat-stricken Spain came from solar power plants, while a year ago this share was 16%. In Sicily, PV output doubled year-on-year in July, covering half of the heat-related extra capacity demand (1.3 GW), according to Refinitiv data.

In addition, the overall demand for electricity in Europe is under pressure due to low economic growth and the ongoing decline in industry. In July, S&P Global’s eurozone PMI dropped to an eight-month low of 48.6 from 49.9 in June, the fastest decline since the lockdowns in 2020. In the first half of the year, electricity consumption in Europe fell by 7%. At the same time, due to the growth in the generation of renewable sources due to favorable weather conditions, the load of gas-fired power plants decreased by 18%, and the share in generation fell to 17% against 44% for renewable sources.

At the same time, despite the decline in gas prices, he failed to significantly push coal-fired generation, contrary to the initial expectations of analysts.

“Contrary to initial expectations that lower gas prices would spur a recovery in demand, consumption in Europe (EU and UK) is down 11% in the first six months of 2023 (or 27 billion cubic meters), said Anouk Honore of OEIS.— This is mainly due to a reduction in consumption in power generation, but also in industry (by 13%, or 6 billion cubic meters), as well as in the utilities sector and by the population (by 5%, or 4 billion cubic meters).” Although the analyst notes that the rate of demand decline in the second quarter was 10% and slowed down compared to the first quarter, it was in the second quarter that the decrease in consumption in electricity generation was manifested (this segment accounted for 75% of the total decline in demand year-on-year). In the second half of the year, Anouk Honore expects weak demand growth of 0.5% yoy, which will reduce the rate of consumption decline by the end of the year to 6%, and then only if the weather in the winter months of the fourth quarter is colder than last year.

Yuri Barsukov