European power prices to ease after 2023 on lower gas prices, renewable capacity gains: Platts Analytics

European power prices are forecast to remain at current elevated levels until 2023 on capacity closures, slight demand gains and rising carbon prices, according to S&P Global Platts Analytics.

From 2024, prices are forecast to fall as renewable capacity gains to offset nuclear and coal closures with gas prices also seen easing.

Platts Analytics' latest five-year forecast sees annual power prices peaking in 2023 at a level close to current forward prices for 2021, already above pre-coronavirus levels driven by the rally in fuel and carbon prices.

"The trends of renewable growth and coal phase out have been sharpened in early 2021 by a strengthening carbon price and heightened ambition from governments and investors to lean into the Energy Transition," Platts Analytics head of European power analysis Glenn Rickson said.

That was reflected in the forecast by a 50% increase for wind and solar generation by 2026 over 2020.

Combined wind and solar capacity was forecast to rise by a combined 178 GW to 2026 across Germany, France, Great Britain, Italy, Spain plus five smaller neighbors (Portugal, Austria, Switzerland, Belgium, Netherlands) covered by the report.

Nuclear capacity was set to decline by net 17 GW vs 2020, while coal and lignite capacity is set to shrink by 29 GW. A combined 30 GW of closures was already materializing by 2023.

New demand drivers remain slow to materialize during the forecast period.

Commodity price inputs

European gas prices were forecast to rise to average around Eur17/mt in 2023 for the TTF, driven by reduced domestic and LNG supply, but a new wave of LNG projects would push gas prices down to the cost of US LNG exports by 2026, it said.

EUA carbon prices were forecast to rise gradually from below Eur40/mt on average in 2022 to close to Eur50/mt by 2026, it said.

EU carbon prices traded above Eur43/mt for the first time in March. This alongside a rebound for gas and coal in Q1 2021 has lifted German power for the year-ahead above Eur56/MWh, the highest for such a contract since 2008 except during a brief spell in 2018.

In 2020, German spot power plunged to a Eur30/MWh annual average

Country profiles

Spain would see the biggest swing in price terms, falling from a premium market in 2019 to a discount relative to France, Germany, Italy and Great Britain from 2023.

"Spain becomes increasingly long through to 2026 on the back of firm wind and solar growth, while coal is effectively out of the market," the report notes.

Only Germany is set to maintain a significant coal/lignite presence over the forecast period, with the nuclear exit by end-2022 and slower wind expansion set to fundamentally lift demand for thermal generation.

"Germany also switches its long-held net export position to net imports from 2022," Platts Analytics Sabrina Kernbichler said adding that German gas was projected to eclipse Great Britain gas generation from 2024 as Europe's second-biggest market behind Italy.

In France, the coal phase-out before next year's election had only a limited impact, but the flexibility of its nuclear fleet will be tested by strong seasonal demand swings with annual nuclear output averaging below 43 GW or 377 TWh/year through to 2026.

For Great Britain with coal squeezed out, the main pivot point for flexible running will be between domestic gas and imports of EU thermal generation as interconnection capacity more than triples to 2026 with new connections to Norway, France and Denmark and even a cable to Germany assumed, the report said.

UK carbon costs were seen at a narrowing premium over EU carbon prices through to 2026.