L R AS Published on Monday 12 September 2022 - n° 415 - Categories:around the PV
The price of electricity comes from gas supplies
With winter just around the corner, Russian gas supply difficulties are leading to price volatility and potentially power cuts.
Spot electricity prices in Western Europe have reached unprecedented levels: average daily prices have exceeded €600 per megawatt-hour (MWh) in Germany and €700 per MWh in France,
Prices are likely to be even higher during the winter months, as Russia has halted all gas exports via Nord Stream 1.
These fluctuations are due to the high volatility of the gas market.
According to Rystad Energy, if gas demand has to be reduced, as seems increasingly likely, Europe will be faced with a range of options, as so far few players have committed to voluntarily reducing their gas demand by 15% between August 2022 and March 2023.
The price of electricity is based on the cost of electricity generators and specifically on the cost of producing the last kilowatt-hour generated, which is generally produced by a gas-fired power station.
The rise in electricity prices is due to a drop in Russian gas supplies (this is the predominant factor), nuclear power failures, low hydroelectricity and disruptions to coal deliveries due to drought. Despite the high price of gas (and therefore electricity), there has been no significant reduction in demand for electricity. In the event of a shortage, EU members have undertaken to voluntarily reduce their gas demand by 15% between August 2022 and March 2023.
If these 15% reductions in gas demand for electricity generation are not achieved, an imbalance between electricity supply and demand could emerge as early as this month and worsen until 2023. The electricity deficit is expected to peak at 13.5 TWh in January, before gradually diminishing.
Gas is still needed in the electricity mix
Despite major efforts, European electricity companies are struggling to reduce their dependence on gas. In fact, gas-fired power generation has increased as a result of the challenges mentioned above. In the EU, the production of nuclear power and hydroelectricity fell by 14% and 25% respectively compared to the previous year. the previous year, taking 110 terawatt hours (TWh) of electricity off the grid. This fall was offset by an increase in the production of wind power, coal, solar power and gas. Overall, gas-fired power generation rose by 6% year-on-year to 39 TWh in July. Things will become even more difficult towards the end of the year, as seasonal demand for electricity increases: Electricity consumption in December is normally 25% higher than in July, which means that European consumption could exceed 280 TWh per month.
Next winter's electricity supply will certainly be the most difficult Europe has seen for decades. Consumers and governments will have to pay the price.
Russian gas supplies have fallen by 89% and could fall further
In the first half of last year, Russia exported almost 350 million cubic metres per day (MMcmd) of natural gas to Western Europe via its main export routes. In recent days, flows have fallen below 40 millioncubic metres per day, down 89% on the previous year. Most of this drop is due to the cessation of flows via Nord Stream 1.
What alternative energy sources could replace Russian gas?
If we were unable to reduce gas consumption for electricity generation in the EU by 15% compared with the average over the last five years, the supply shortfall - which could be as high as 50% - would be enormous.5.5 TWh per month - would have to be replaced by other sources, by reductions in demand or by an increase in electricity imports into the Union.
Electricity generation from hydroelectricity and nuclear power has fallen sharply this year, while coal, gas, solar and wind power have all increased.
Coal-fired power generation increased by 12% year-on-year in the EU as a whole this year. It can be used more if necessary in December and January.
Hydroelectricity production, on the other hand, has fallen by 25% so far this year. Water levels in Europe are at their lowest. Hydropower production is therefore likely to remain low over the next six months.
Nuclear production in the EU has fallen by 14% since the start of the year. The outlook is bleak. EDF is working to bring nuclear reactors currently under maintenance back on line for the winter.
Solar and wind generation are both up strongly this year - by 25% and 14% respectively - thanks to particularly large capacity additions. The growth forecast for the remaining months is in line with capacity additions that could total 25 gigawatts (GW) for solar and 15 GW for wind in 2022, representing year-on-year increases of 16% and 8% respectively.
Increased electricity generation from coal, solar and wind could help to partially cover the fall in gas supplies by adding a further 34 TWh between September and March 2023. However, this would not be enough to make up the shortfall in gas, nuclear and hydroelectric generation, meaning that additional measures would be required.
European demand for electricity has fallen by 2.2% since the start of the year,
This is mainly because record high prices have reduced demand, particularly from the industrial sector. The persistence of these high prices is likely to keep demand at its current low level, or even cause it to fall further. A similar year-on-year fall of 3% over the next few months is conceivable, not only because high prices are affecting industrial consumers and households, but also because of the electricity saving measures introduced by governments.
After a review of supply and demand, and a 15% drop in demand for gas to produce electricity, the imbalance between supply and demand could appear as early as this month and worsen until 2023. The deficit is expected to peak at 13.5 TWh in January, before gradually diminishing.
The total electricity deficit of 51 TWh in the EU for the whole period from September 2022 to March 2023 would require additional imports from countries outside the EU. It can also be made up by a 5% reduction in total demand compared with 2021.
Rystad Energy's analysis shows that the balance of power generation in Europe is severely compromised in a scenario where gas supply is significantly reduced, as there is little flexibility to significantly increase generation from other sources. Any other solution would require a sharp fall in electricity demand.
Rystad Energy of 5 September 2022
