European winter power prices climb to crisis-era highs

European electricity prices for the coming winter have risen to their highest levels since the 2022 energy crisis, with German January contracts trading above €180 a megawatt-hour as gas supply concerns and geopolitical disruption tighten the market across the continent now.

The German benchmark on the European Energy Exchange is more than 60 per cent higher than a year ago, signalling growing concern over the cost of keeping homes and industry supplied through the coldest months. Futures across north-west Europe have strengthened sharply as traders price in expensive natural gas, weaker hydro availability and uncertainty over nuclear output.

Natural gas remains the central driver. European storage sites are only about 69 per cent full, well below the five-year seasonal average of roughly 85 per cent, after high summer prices discouraged aggressive injections. The European Commission said this month that there was no immediate threat to security of supply, citing stronger liquefied natural gas import capacity, more diversified sources and lower structural demand than during the 2021-22 crisis.

That assessment has not prevented a steep risk premium from building into winter contracts. The conflict involving Iran has disrupted energy flows through the Middle East, while the closure of the Strait of Hormuz has halted Qatari LNG shipments, removing a major source of flexible supply from the global market. Europe must therefore compete more intensely with Asian buyers for cargoes, particularly from the United States.

Market pressure has also spread beyond gas. German fourth-quarter baseload power settled close to €177 a megawatt-hour on September 18, while the 2027 contract was above €132. French fourth-quarter power was near €157 and its 2027 contract around €87, reflecting differences in generation mix and expectations for nuclear availability.

France, normally one of Europe’s largest electricity exporters, has faced interruptions from extreme summer heat and industrial action. A strike by electricity-sector workers temporarily removed about 6.5 gigawatts of capacity earlier this month, much of it from nuclear reactors. Low river levels and weak hydropower stocks in parts of Europe have added another constraint, increasing dependence on gas-fired plants when renewable output falls.

The winter test will be most severe during cold, windless periods, when solar generation is seasonally low and wind farms cannot cover demand. Gas-fired stations often set the marginal wholesale price during such hours, allowing expensive fuel to feed quickly through electricity markets even where renewable capacity has expanded.

Ulf Ek, chief investment officer at Northlander Commodity Advisors, said wholesale electricity prices could rise by as much as 50 per cent during a cold winter if Middle East supplies remain constrained. He said markets could rally more rapidly if weather conditions fail to provide enough wind and solar generation.

The increase is already filtering towards household bills, although the effect varies by country because suppliers hedge purchases in advance and governments use different support systems. Britain’s energy regulator Ofgem has raised its price cap for a typical household paying by direct debit by 4 per cent from October, to £1,723 a year, following a 13 per cent increase in July. Further rises are expected to be reflected when the January cap is set in November.

Norway, by contrast, is expected to shield households more heavily through state support. Across the European Union, policymakers are watching the broader inflationary effect because higher electricity and gas costs raise expenses for manufacturers, transport operators and service companies as well as consumers.

Europe nevertheless enters the winter in a stronger structural position than it did four years ago. LNG import terminals have expanded, gas consumption has fallen and supply sources are more diversified. During the 2022 crisis, wholesale power prices at times exceeded €1,000 a megawatt-hour, more than five times current German January futures.