ELS #Energy - Market reforms on the horizon?

Despite a steady fall in prices over the past week, energy commodity markets continue to face elevated risks from volatile supplies, prompting the EU to reach both for more stable fuel suppliers and for reforms of the power markets.

Power prices across Europe have been coming off the August peaks of over €700/MWh as renewable generation contributes a larger share. However, power markets face increasing high price and volatility risks as renewable generation rises and falls with the wind, Russia’s gas cutoffs intensify and nuclear plant capacity goes offline across the continent and Nordics due to unplanned maintenance. The EU Commission now appears to view the merit order system as not working for power consumers, with EU Commissioner Ursula von der Leyen pointing to possible market reforms around it. She also indicated that the TTF gas price benchmark is not adapted for electricity trade and that a more representative benchmark will be sought.

As part of the broader search for non-Russian fuels, Germany is in talks with Kazakhstan to pipe oil into the EU country. This coincides with the German takeover of Russian company Rosneft’s stake in three German refineries capable of processing the oil into fuels, and comes ahead of a potential EU embargo on Russian oil in the coming December. While not enough individually to secure the energy supply through the winter, such energy supply deals with non-EU countries will be essential cumulatively to give the bloc a chance to weather the storms of the approaching winter, particularly as resumed Russian gas supply increasingly looks like nothing more than a pipedream.

ELS Analysis is watching the developments of fuel supply possibilities and their potential consequences on power prices in the short to medium term, while developments towards market reforms will be important to observe in the longer term.

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