Four Themes Shaping the Future of the Stormy European Power Market

Euro Energy details in play  ... 

Four themes shaping the Future of the Stormy European Power Market

January 27, 2023 | Article    in McKinsey

By Markus Schülde,  Xavier Veillard  and  Alexander Weiss 

Demand for electricity in Europe is surging at a time when supplies are disrupted. To adapt to the market’s uncertainty and rising prices, players will have to be clear-eyed about what’s ahead.

The past year has been a tumultuous one for European energy markets. After experiencing extreme volatility and all-time highs little more than a year ago,1 power prices across the continent rose to a nearly unfathomable level last fall. Wholesale prices of both electricity and natural gas nearly quadrupled from previous records in the third quarter of 2022 compared with 2021, creating concerns for skyrocketing energy costs for consumers and businesses (Exhibit 1). Prices have since fallen unexpectedly, thanks in part to warm winter weather.

Such volatility highlights the structural challenges Europe faces as it seeks to transition its energy system away from carbon-emitting fossil fuels. At a time when these decarbonization efforts are boosting electricity demand across Europe, the market is reeling from unprecedented supply constraints. The war in Ukraine, disruptions to nuclear facilities in France, and low output from hydroelectric plants have combined to significantly reduce the continent’s dispatchable power—electricity that can be easily switched on and off. Primarily driven by drought, hydro output was down by 19 percent between January and September 2022 across Europe, compared with the same period in 2021.2 In France, where 32 of the country’s 56 reactors were down for maintenance in September, nuclear energy output has declined by 14 percent over the same period (Exhibit 2).3 Even more destabilizing is the dwindling supply of Russian gas. Prior to the invasion of Ukraine, Russia supplied 30 percent of Europe’s natural gas, a resource that exerts a large influence on electricity prices and is a mainstay of the continent’s power mix. That proportion dropped to 15 to 20 percent in 2022 and is likely to decline further this year..... '