EU energy in 2019: a year of unprecedented events

Seemingly any energy industry commentator will claim that any given moment in the energy industry is the most exciting, uncertain, dynamic, unpredictable or unprecedented moment since, well… since the last unprecedented moment.

However, rather than being a reflection of groupthink on the part of a whole industry, this obsession with events each more unprecedented than the last is more a reflection of the fast moving, unpredictable and often economic logic-defying nature of the energy sector we are increasingly witnessing.

Energy markets have always been characterised by a small handful of perennial market-moving dynamics – Middle East political tensions, supply interruptions, climate change policy and the global economic prognosis to name but four. Predictably, any significant occurrence in any of these dynamics often leads to cries of "unprecedented".

Despite this collective near-hysteria, there are some (rare) occasions when the word unprecedented has been justifiable. Epoch-defining chapters in energy industry history such as the oil price shocks of the 1970s, the Fukushima nuclear disaster, the US shale gas boom and any set of events that are collectively labelled "an energy crisis" are as significant as they are rare.

However, European gas and power markets in 2019 have borne witness to, many convention-busting events that are, in the very fullest sense of the word, “unprecedented”.

Here are some recent examples.

US LNG floods into Europe despite low prices, high stocks

Throughout 2019 US LNG continued to flood into Europe as a result of periods of mild weather and unusually weak Asian demand.

This stubbornly resilient LNG influx is surprising not only in the context of the low-price environment driven by oversupply and weak underlying demand, but also because it is set against a backdrop of high pipeline gas flows into Europe, most notably from Russia.

With JKM dropping below $6/MMBtu during the summer of 2019 for the first time since summer 2017 (compared with over $12/MMBtu just six months before), the incentive to ship LNG volumes to Europe grew.

This has set up an interesting dynamic, putting US LNG producers and Russian/European pipeline gas producers into a head-to-head contest to see who will blink first. As prices hurtle ever lower, the question becomes one of who will be forced to curtail production first.

Go deeper: Read S&P Global Platts 2020 Outlook

European gas storage completely full for the first time

Given the deluge of gas landing in Europe, it comes as no surprise that storage injection facilities were a popular destination for spare therms of gas, so much so that by the end of August 2019 European storage facilities were essentially full for the first time ever.

Notably, the incentive to store low price gas was so strong that some storage facilities were able to store more gas than their nameplate capacity would suggest. Slovakia, Belgium, Denmark and the UK all expanded their capacity such that an additional 700 mcm of gas was stored.

Rising ESP sales volumes despite a falling market

Another contradiction in the market comes from the fact that Gazprom’s

volumes rose over the first eight months of 2019, despite falling prices.

Falling hub prices incentivised buyers with long-term contracts with Gazprom to nominate down their optionality, generating more volume for Gazprom to sell flexibly on the ESP, further increasing the supply glut into Europe.

Production shut-ins become a possibility

Gas prices for the Summer 19 contract fell so low at one point that there was a tangible possibility of both Russian and Norwegian short run marginal cost (SMRC) levels being breached.

Talk of Russian SMRC levels ($2.80/MMBtu) being breached was highly significant, however when the debate moved to the possibility of prices breaching Norwegian SMRC levels ($1.50 to $2.50/MMBtu), it was clear the market was in unprecedented territory.

Record low coal generation

Counterintuitive developments were not just seen in the gas market – the power market also saw its fair share of notable events.

So far in 2019 there have been a total of 157 days of zero coal plant running in Britain, up from 91 days in 2018, reflecting the relative cost advantages of gas-fired generation in the current market and reduced incentives to burn coal.

The parlous state of the coal sector is also reflected in the decision by RWE to close the Aberthaw coal fired plant three months ahead of schedule. While the wider closure decision is less of a surprise, the fact that it occurred three months ahead of previously announced plans and in the peak mid-winter demand season is important, and reflects strongly negative clean dark spreads for the peak winter Q1 2020 period.

Four-year low winter gas generation 

December gas-fired generation fell to a four-year winter day low, despite low gas prices resulting from record LNG flows. In the absence of such strong wind generation, the low gas prices would have incentivised much higher levels of gas fired generation.

Negative power prices

A number of markets have seen negative power prices during the second half of 2019.

Over the weekend of December 7-8 a combination of high wind generation and low demand resulted in the British intraday system price moving into negative territory for 13 hours, the longest period of negative prices on record.

Around the same time, the N2EX Day Ahead contract traded negatively for the first time ever, at minus £2.80/MWh for delivery on 9th December.

French nuclear flexibility

French nuclear generation has shown an unusually high degree of flexibility during 2019, responding to periods of low demand and/or high wind generation levels.

French nuclear generation has always shown some downward flexibility in low demand periods in summer (unlike other markets where nuclear tends to run at baseload throughout the year), reflecting the dominant role of EDF’s nuclear fleet in France and the country’s lack of flexible generation capacity.

However, this year has seen a new scale of turndowns with minimum hourly loads around 10% lower than 2018. As a result of this, unlike neighbouring markets, France has not seen any periods of negative pricing since July.

Record wind output

Wind generation in Britain recently reached new record levels, peaking at 16.9GW (75% of capacity) on 10th December. Meanwhile, gas generation on December 8 fell to a four-year low for a winter day, pressured by high wind and out-of-merit coal running.

Rather than being a collection of unrelated events, the above examples point to a changing energy industry. As the energy world gets smaller and market fundamentals evolve, predictability and uncertainty increase commensurately.

As such, market observers need to delve into the detail more than ever before, carefully interpret signals and, above all, always expect the unexpected.