European gas, power price spikes ease on Russia sanctions downplay

The fear of energy sanctions on Russia saw gas and power prices spike early March 7 before European leaders moved to play down the likelihood of such a move.

"Europe has deliberately exempted energy supplies from Russia from sanctions," Germany's Chancellor Olaf Scholz said in a statement.

Similar statements by Dutch Prime Minister Mark Rutte and UK Prime Minister Boris Johnson followed, deflating front-month Dutch TTF gas on the ICE exchange from Eur345/MWh in the morning to a Eur227.20/MWh settle -- still a record for the contract.

Similarly, front-month German baseload power was up over 54% at one point to Eur675/MWh on the EEX exchange before falling back to Eur440/MWh late afternoon, again above the contract's record settle.

Economic sanctions already imposed on Russia, twinned with ongoing military action inside Ukraine and deteriorating relations between the Russian State and the West continue to cast enormous uncertainty over the immediate availability of Russian gas to Europe in 2022, S&P Global Commodity Insights analysts said.

The following are key developments impacting power and gas assets in the region:

Trade

-- Russian gas transport through Ukraine has been in decline in recent years and fell sharply at the start of 2022, but is now flowing at maximum contractual levels as Gazprom-contracted gas becomes more competitive versus hub gas. So far, the war has not led to any disruption to gas transit.

• Ukraine remains a key transit route for Russian gas to Europe, accounting for a little under 10% of Europe's gas demand in 2021.
• Under a five-year transit deal between Gazprom and Ukraine's Naftogaz in 2019, the Russian company agreed to send a minimum of 110 million cu m/d of gas via Ukraine to Europe under ship-or-pay terms in 2022, meaning it must pay for that level of transit whether it uses the route or not.
• Deliveries via Ukraine fell sharply in January, but have been at the contractual maximum of 110 million cu m/d in recent days.

-- European electricity transmission system operators are to consider Ukraine's request for emergency synchronization with the continental European network in mid-March, enabling flows of power from the west.

• The Ukraine power system has been operating in independent mode after delinking from Russia and Belarus Feb. 24.
• The network has maintained stable supply despite localized outages since the conflict began, coal stocks having been built up at power stations ahead of desynchronization.

-- Several European member states have called for wholesale power market reform to limit the impact of gas on power price formation.

• Spain has applied a gas price cap on power generators and a claw back tax on non-gas generators benefiting from high prices.
• The European Commission is to announce proposals March 8 to diversify supply of gas away from Russia and towards reliable suppliers of both LNG and pipeline gas.

Prices

-- European gas prices surged to fresh highs in March as Russia continued its invasion of Ukraine.

• S&P Global Commodity Insights assessed the front-month gas price on the benchmark Dutch TTF hub at Eur195/MWh on March 4, an all-time high, and 200% higher since the start of 2022.
• The JKM front-month LNG benchmark price reached a record high on March 7 of $84.76/MMBtu ahead of European leaders' statements.

• Exposure to the global LNG market is putting upward pressure on Winter 2022-2023 gas prices in the US. Since Russia's invasion of Ukraine, the Algonquin city-gates January 2023 contract is up almost 28% to $27.73/MMBtu, according to S&P Global Commodity Insights data.

• US LNG export prices have surged to their highest on record since Russia's invasion of Ukraine began with the Platts Gulf Coast Marker settling March 4 at over $58/MMBtu.

-- Record gas prices have helped drive up coal-fired generation across Europe's major markets, output up 10% in February year on year.

• The economic margin for a 45% efficient German coal unit by close March 4 was Eur244/MWh above that for a standard gas unit for the front-month, data from S&P Global showed.
• Europe's benchmark German year-ahead power contract climbed 8% March 7 to Eur183/MWh, EEX data showed. Over a month's view the contract has risen over 30%.

-- Carbon prices have fallen sharply since the conflict began, with buyers offloading positions partly due to fears of a recession and potential energy demand destruction.

• EU Allowances for December 2022 delivery on the ICE Endex exchange traded as low as Eur56.82/mt CO2 equivalent March 7, compared with Eur65.10/mt at the close March 4.

Infrastructure

-- Ukraine gas and power assets are being disrupted by the conflict.

• Ukraine's state-owned gas storage operator UkrTransGaz has halted operations at the 0.4 Bcm capacity Krasnopopivsky facility in the Luhansk region of eastern Ukraine due to nearby hostilities.
• State-owned producer UGV has also halted gas production at some sites near the conflict.

-- Nuclear power reactors at four sites account for around half of Ukraine's power needs.

• A projectile hit a building at Ukraine's largest power station, the Zaporizhzhya nuclear power plant, March 4, causing a fire but no release of radiation.
• As of March 7 Russian forces were in control of Zaporizhzhya but operator Ukrenergo reported two units were connected to the grid despite damage to local power lines. Nuclear meets over 50% of the country's power needs.
• Ukraine generator and coal miner DTEK has activated nine of its thermal power units to compensate for losses on the network, with 23 online instead of the planned 14.
• S&P Global Commodity Insights forecasts an average 14.3 GW of European coal generation in 2022 versus 10.7 GW in 2021 with coal seen as important to security of supply.

-- The now complete Nord Stream 2 gas link appears to be dead.

• Germany suspended certification of the route on Feb. 22, and the US imposed sanctions on the operator Nord Stream 2 AG the following day.
• European financing partners – Shell, OMV, Uniper, Engie and Wintershall Dea -- have distanced themselves from the pipeline, with several writing off their investments.