The downside of the spectacular fall in energy prices in Europe

Are energy forecasts too pessimistic? Even though Europe is going a little deeper into winter, 2023 opens up in favorable conditions: the worst-case scenario that ultimately prevails for both gas and electricity. In fact, in 2022, warnings of sudden outages or rising prices that marked the news have been replaced by calm. And this, although the usual fresh January is shaping up to be the most critical month for the Old Continent, deprived of a large part of the Russian hydrocarbons it considered until then.

Indeed, this Monday the price of gas fell to its lowest level since the start of the war in Ukraine, and one megawatt-hour (MWh) traded for 73 euros the following day on the Dutch TTF index, the European benchmark exchange. This is significantly lower than last August, when gas reached close to €300 per MWh after Moscow announced supply cuts.

First of all, and this is the first, gas prices have also fallen in the futures markets (where prices are set for delivery in 3 months to 5 years).): Contracts for the fourth quarter of 2023 traded around €80 per MWh on Monday, compared with €150 in recent months. In other words, markets are now anticipating a rally after months of extreme volatility.

The trend for electricity is even more noticeable: on December 12 last year, electricity was sold at 750 euros per MW in the European Union, while prices varied from 0 to 40 euros only from December 13 to yesterday! Even if they rose to an average of 170 euros on Monday, these levels are surprising given the number of alarm bells in recent weeks.

Electricity consumption in France continues to fall, reducing the risk of blackouts until mid-January

In the second half of 2022, consumption will decrease by 15%

Does this mean that the measures taken to prevent price increases in Europe have worked and the crisis is over? “In fact, the main factor was the destruction of energy demand “, he explains Gallery Jacques Persebois, economist and director of the Center for Research on Energy Economics and Law (CREDEN). In other words, consumption fell significantly in recent months, by an average of 15% in the second half, which prevented the specter of a shortage. And this is not always desirable for several reasons:

The researcher emphasizes that “there have been attempts at vigilance, but companies have also reduced their activities due to inflation or a decrease in economic activity.”

According to RTE, the French manager of the electricity transmission network, the industry has thus reduced its electricity consumption by 12% over the past four weeks. As for gas, Jean-Pierre Clamadye, president of Engie, noted a decline at a conference in Medef on December 6. “very high consumption, about 30%” more than a year in large industrial groups. Unsurprisingly, although these behaviors have contributed to lower prices by allowing energy consumption to be limited, above all they reflect the deep difficulties the sector is going through. ” However, it will take several months to determine the extent to which this phenomenon is suffering rather than being selected. », nuance Jacques Persebois.

Exceptionally high retention levels

In addition, another element caused a significant decrease in demand: apart from a short-term cold in early December, the temperature has been extremely mild. While this mild weather has greatly reduced demand for heat, Europe has thus been able to replenish its underground gas reserves, particularly record-breaking imports of ship-borne liquefied natural gas (LNG), as well as Russian gas before the decline. of deliveries.

The bottom line: demand for warehouses was low, and thus the average fill rate at the European level remains quite high at more than 83% (compared to 95% in mid-November). At the same time, this is 30% more than last year, and 10% more than the average of the last five years. In this regard, ” The European Union has played a major role “says Jacques Persebois. In fact, the EU-27 adopted a regulation this summer encouraging member states to fill their underground gas storage to at least 80% by winter.

Market overreaction

Still, the return to normalcy is far from over. ” Even at €73 per MWh of gas, we remain well above US prices flirting between €25-30, i.e. the levels we know in Europe until 2020! “says Jacques Persebois. French bills will also increase this year, despite the calm, as the price of regulated gas is expected to increase by 15% compared to October 31, 2021 – that is, about 130 euros per person and year.

Moreover, the optimism of markets for futures contracts is not necessarily a guarantee of real improvement: “ They overreact relative to the day’s price for the next day. When the latter falls steadily, so do the futures markets. But there is still a lot of uncertainty over the next three months, and the trend may well reverse. adds the researcher. Especially if the temperature drops.” will play a lot on consumption – this means that it is almost impossible to accurately predict the evolution of prices. Moreover, 93% of industrialists still expect interruptions in their activities due to the energy crisis, according to the latest Big advice of entrepreneurs carried out by OpinionWay for CCI France, La Tribune and LCI and published on Monday. .

The International Energy Agency (IEA) warned last December that the worst is yet to come, especially since the end of winter in March. And for good reason, given the risk of running without Russian gas to supplement the European Union then, it could face a potential shortfall of around 30 billion cubic meters of natural gas, which was not the case in 2022. What a threatIn the Old Continent, the pressure on industry and households is increasing slightly.

Energy crisis: why 2023 will be even more critical for Europe?