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Rising Carbon Prices Are Pushing Up Energy Bills

May 10, 2021

By Paul Homewood

 

Timera have just published a new analysis of European energy prices:

 

 

 image

Carbon prices have hit 50 €/t. Winter 21 prices for German power are pushing 70 €/MWh. Winter prices for TTF gas are around 25 €/MWh (8.75 $/mmbtu), with JKM at 10.50 $/mmbtu.  These levels reflect an explosive rally underway in the energy price complex.

We are going to keep it short and sweet this week and let one of our key charts do the talking.

Chart 1 shows the impact of surging carbon prices in pulling coal & lignite plant switching ranges higher. Rising switching levels are dragging up the TTF gas curve, pulling European power prices & Asian LNG prices higher with it.

The dynamics in play behind surging prices can be broken down into 4 main drivers.

1.Carbon prices

The single most important driver of higher European gas & power prices in 2021 is rising carbon prices.  This is acting to pull both hard coal and lignite switching levels higher. Rising switching levels translate directly into higher European gas hub prices, with power prices following suit.

The higher the carbon price has risen, the more influential lignite switching has become. A 1 €/t move in the EUA price causes around a 0.45 €/MWh move in the lignite switching range compared to a 0.25 €/MWh for the coal switching range.

Chart 1 shows the front of the TTF curve sitting near the top of the lignite switching band.  That means each €/t move higher is having almost double the impact on TTF vs the hard coal switching mechanism we are used to.

2.Russian & Norwegian supply

Europe’s two big pipeline gas suppliers are not responding to surging hub prices. European gas demand has been running at 5 year highs in 2021, so a lack of pipeline supply response is helping support prices.

Russian flows via the Ukraine route fell sharply into 2020 as the new transit agreement came into force. This drop also came against a backdrop of very low hub prices.  Russian flows across this route started to rise again in Q4 2020 as TTF prices recovered, but have fallen back again in 2021.

Gazprom’s flow decisions are not a simple price / volume optimisation problem. A rapidly tightening European gas market is a convenient backdrop for Gazprom to apply political pressure on the EU (& Germany in particular), in order to ensure Nordstream 2 comes into operation.

Norwegian production has been relatively low in Q2 2021, with Norway engaging in major maintenance early this year. Production in the Netherlands is also ramping down fast with the giant Groningen field on track to close by mid 2022.

3.Asian LNG demand

Strong Asian LNG demand is important for European gas & power markets, as it results in the diversion of flexible LNG supply. This has been a theme of 2021 as Asian economic growth & gas demand recovers strongly, particularly in China.

After the fireworks of January 2021, Asian LNG demand cooled into March.  But there is mounting evidence of a resurgence in Asian demand through the summer.  The JKM forward price premium over TTF is rising, with netbacks for US LNG exports favouring flows to Asia.  The time charter market is also tightening again (with rates back above 70k $/day), signalling a stronger pull for LNG from Asia.

European gas demand is strengthening against a backdrop of supply volume weakness across both pipeline and LNG imports.

4.European storage balance

European gas storage levels are low coming into the summer injection season.  A blast of cold weather in April has seen aggregate storage inventories fall to around 30% full, versus 60% last year and a 40% 5yr average. Low Norwegian supply due to early maintenance has contributed to strong storage withdrawals.

These dynamics have caused an unusual shape in the TTF forward curve. May 21 has been pricing well above the summer months, reflecting an immediate demand for gas, prolonging the storage withdrawal season.  Low storage inventory levels will support strong summer gas demand for injections to replenish stocks, another factor lifting the TTF curve.

https://timera-energy.com/4-drivers-of-surging-european-energy-prices/ 

Don’t get too tied up in the detail of the graph – it simply charts gas price trends.

But the key factor is the “coal switching range”. As gas prices rise, they eventually reach the point where it is cheaper to switch from gas power to coal power. And as carbon prices rise, that switching point also rises, because coal power is more carbon intensive and therefore attracts a higher carbon penalty.

As Timera explain, rising carbon prices this year, which are the direct consequence of EU policy, not only make coal power more expensive, but also encourage greater demand for gas. This, in turn, forces up gas market prices.

While Timera discuss other factors acting to push gas prices up, such as increased Asian demand, it is carbon pricing which is, and will remain, the most important driver.

This obviously has a knock on effect on UK gas and power prices. Catalyst Energy show below how fast UK wholesale power prices have risen this year.

image

 https://www.catalyst-commercial.co.uk/works/may-2021-energy-market-brief/

 

 

OFGEM’s chart below shows the longer term trends, up to Dec 2020, indicating that current prices are probably now at record highs:

 chart

 https://www.ofgem.gov.uk/data-portal/all-charts/policy-area/electricity-wholesale-markets

 

 

The sole intention of carbon prices, of course, is to make fossil fuel power more expensive than renewable energy. But it is energy consumers who will inevitably pay the cost.

25 Comments
  1. Andrew Harding permalink
    May 10, 2021 7:12 pm

    Paul the graph is unreadable, its scale is too large!

  2. May 10, 2021 7:37 pm

    ok on firefox and windows 10

    • Dan permalink
      May 10, 2021 9:32 pm

      EU policy is a stretch given that many countries had already implemented a carbon tax prior to the ets.

      That said it is “interesting” to see claims, in the media, of renewables (not integrated into the grid) being cheaper and the need for carbon taxes to fund said roll out.

  3. May 10, 2021 7:38 pm

    All the graphs are perfect on my browser

  4. Alan D Tomlin permalink
    May 10, 2021 7:47 pm

    Graphs are fine on Firefox, Chrome and Edge browsers (OS – Win10)

  5. MrGrimNasty permalink
    May 10, 2021 9:10 pm

    Sir David Attenborough has been named as the people’s advocate at COP26.

    NOT IN MY NAME.

    • bobn permalink
      May 10, 2021 9:18 pm

      COP = Cabal Of Propagandists

    • Devoncamel permalink
      May 10, 2021 10:28 pm

      The people’s advocate who thinks it would be better if none of us existed. Who elected him?

      • Duker permalink
        May 11, 2021 1:33 am

        He saw long ago what happened to his ‘peer’ David Bellamy, who actually had a botany science career and published extensively.
        The ‘Peoples David’… apart from his degree in geology and zoology and that was it.

      • Chaswarnertoo permalink
        May 11, 2021 8:49 am

        We are the carbon they want to reduce.

    • MrGrimNasty permalink
      May 11, 2021 9:05 am

      “The carbon-units infestation is to be removed from the Creator’s planet.” [Star Trek movie]

  6. bobn permalink
    May 10, 2021 9:21 pm

    It is deceitful to say Carbon prices. The true terms is Carbon taxes. Its an artificial Govt invention – taxes you can barter.

  7. It doesn't add up... permalink
    May 10, 2021 9:29 pm

    More up to date than OFGEM is Nordpool:

    https://www.nordpoolgroup.com/Market-data1/GB/Auction-prices/UK/weekly/?view=chart

    You may need to ensure that the currency is set to GBP.

    Some of the surge in prices is simply because of severe underperformance from renewables, forcing the use of much more fossil fuelled generation, and causing tight supply. So it may be a bit more chicken and egg than Timera imply: higher prices for gas allow the carbon price to rise. It’s worth noting that the value of renewables electricity produced tends to be a lot lower, because there is much more tendency to produce to excess and curtail when the wind is strong, now that capacity in the UK is above overnight demand lows.

    The system prices show very clear banding and switching effects. We can see wind surpluses, when prices are low, zero or even briefly negative. There is a normal peak load pricing which covers CCGTs fired up to meet demand at higher times of demand, in the £50-100/MWh range, and there is a lower, steadier level that represents base load provision from the most efficient CCGT units that run almost continuously. Then there are periods of very high pricing when the system is under stress, where coal has been called on to help out alongside just about anything else they can persuade to crank into action. See chart:

    https://image.vuukle.com/9ffc6604-feed-474e-a82d-c2de2f561502-b6a02cd1-ac18-4392-9143-471b57831182

    The capacity shortage is beginning to bite when renewables fail.

    • Jack Broughton permalink
      May 11, 2021 5:52 pm

      I would guess that Dinorwig and Cruachan buy during those low-price points and sell during the highs? Good time to be in storage as the rest of the trading can be little more than gambling on the weather, unless there is a libor-type cartel?

  8. May 10, 2021 10:04 pm

    Completely off topic but may be of interest to you all. You may be surprised by what I discovered or maybe not.

    Weighing the benefits and risks of the Astra Zeneca Covid 19 vaccine has through very personal reasons dominated my thoughts of late. My wife became quite ill after her first dose.

    My sources of information were those well known anti vaxxer sites the UK Medicines and Healthcare products Regulatory Agency (MHRA) and the European Medicines Agency (EMA).

    Both these regulators are analysing the same vaccine and their regulatory processes are aligned, as you would expect.

    They both use the same world renown experts for the analysis, the Winton Centre for Risk and Evidence Communication at Cambridge University. Even though the UK has left the EU the EMA business is conducted all in English.

    Both regulators gather data with care and due diligence and look vigilantly for any “safety signal”.

    It is for Governments to decide what to do about “safety signals”. The regulator will only withdraw a vaccines licence if adverse events are caused by product failure or when potential harm exceeds any benefit.

    The two risk/benefit analysis are below, they are for the same thing!
    At the moment with “low exposure” to Covid, the risk/benefit case is finely balanced particularly for women

    https://wintoncentre.maths.cam.ac.uk/news/latest-data-mhra-blood-clots-associated-astra-zeneca-covid-19-vaccine/

    Click to access annex-vaxzevria-art53-visual-risk-contextualisation_en.pdf

    Of course in UK after 50 million vaccinations we all know there are some good low harm vaccines (Pfizer and Moderna) and also a vaccine that really has some downsides (Astra Zeneca). Unfortunately we got stuck with AstraZeneca while the rest of the developed world went for Pfizer.

    The UK use a lot of modelled data, the EU tend to use more real data, both approaches have inbuilt uncertainties. However so far in regulating this problem the EU have been two steps ahead.

    The UK winton document makes any easy to understand read, without patronising the reader.

    • bobn permalink
      May 10, 2021 11:55 pm

      I read that there was a higher death rate among pfizer & moderna takers than Astrazeneca takers. The info coming out is very contradictory but Pfizer had far less testing than Astra. A shambles in every direction.

      • May 11, 2021 12:25 am

        The data collected by regulators is analysed closely, the Pfizer and Moderna vaccines have few problems, I am afraid the AZ vaccine has real problems.

        There is no need to do a risk/benefit analysis on Pfizer, because there is almost no harm.

        Nothing is hidden, its all there for you to see, but the main difference is the UK has Boris.

      • Duker permalink
        May 11, 2021 1:38 am

        ” higher death rate among pfizer & moderna takers than Astrazeneca takers. ”
        Impossible to compare outside trials as so many people die every day anyway and in a mass vaccination starting with elderly it will happen ‘often’

        In Australia with the risk of blood clots , they pointed out that EVERY day there is 50 people presenting with blood clots, long before vaccines were used for covid.

  9. May 11, 2021 3:55 am

    Economic suicide for the climate?

  10. Vernon E permalink
    May 11, 2021 12:30 pm

    Just watched on Euro News some senior and serious business gents lauding the environmental wonders of a project to be developed at Rotterdam to capture and store carbon dioxide from the surrounding industries. These guys can’t be idiots so there is something in it for them i.e. negative (removed) carbon dioxide is now a viable commercial product. Can anyone explain to me how this works?

  11. Jack Broughton permalink
    May 11, 2021 6:44 pm

    Apparently massive funding is agreed for the Peterhead Power Station CCS project. This is the third (at least) round of funding for this project. As SSE are behind it with SNP (ie UK tax-payer) support it might get further this time, but still years off.

  12. Jack Broughton permalink
    May 12, 2021 9:18 pm

    Another interesting piece today about EU funding of “Renewables”. The EU have just approved €400m to Denmark for renewables development: though that they had the market cornered anyway! They complained when the UK approved aid…….

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