Next winter’s electricity futures prices have dropped to only 8–10 cents per kilowatt hour. The filling rate of gas storages in Europe is close to a record level, even though winter is already well under way.
In the energy market wild things happen again, but this time they are at least positive from the consumer’s point of view. Both natural gas and electricity have fallen sharply after Christmas. Even futures prices predicting next winter’s electricity price have fallen quite quickly.
The market is now predicting that next winter electricity in the Nordic countries will cost only 8–10 cents per kilowatt hour without taxes. For the summer months, futures predict prices without tax of about five cents.
Futures are derivatives market products that power companies can use to hedge electricity purchase prices far into the future.
The next day’s electricity is priced on the exchange’s so-called spot market. Spot prices have been low almost throughout January, even though we are living in the middle of winter, when electricity is usually consumed the most.
In January, stock-exchange electricity, including VAT, has paid an average of less than 8.7 cents per kilowatt hour. The price in January was really low, because last time the average price of the month was cheaper than this in October 2021.
Price development there are many factors behind it, including the mild weather. However, one key reason for the low price is that the natural gas situation in Europe looks so good right now. The last time the price of natural gas was this low was in September 2021.
According to a report by the University of Oxford’s Energy Institute, the level of natural gas reserves in Europe is now almost at a record high.
In mid-January, there were approximately 87–88 billion cubic meters of gas in storage, and the amount had practically not decreased at all since Christmas. According to the German energy authority Bundesnetzagentur, Germany’s gas storage capacity was 83 percent on January 27.
Gas has been available on the market so well that the consumption of gas needed for energy and industrial raw material has not consumed stocks as in previous years.
Year then at this time the situation was significantly weaker. There were only about 50 billion cubic meters of gas in the warehouses. The previous fall had been exceptional, when Russia used various measures to deplete Europe’s gas reserves even before the attack on Ukraine.
In November 2021, there were only 80 billion cubic meters of natural gas in storage, which means that we started the winter with weak provisions. Last November, the inventory reading was 100 billion cubic meters, so the situation was significantly better.
Europe the mild weather after the cold start of December has helped. It has saved the use of gas.
“The longer this mild weather continues, the better situation we will be in Europe, when we have to start filling up the stocks again with the next winter in mind,” says the CEO of the gas sales and distribution company Auris Mika Paloranta.
The import of liquefied gas, i.e. LNG, which replaces pipeline gas, has also been increased faster than anyone could have imagined until last spring.
Terminal ships are in operation elsewhere than in Finland, and even fixed new LNG terminals are now being built at a rapid pace in Germany, for example.
Natural gas the price began to rise insidiously already in the summer of 2021. Russia reduced pipeline gas deliveries to Central Europe, citing various reasons. At that time, it was not yet known or dared to guess that it was a preparation for the offensive war that started in February.
In Russia, it was perhaps believed that the fear of a gas shortage would prevent Europe from imposing economic sanctions on Russia. It did not succeed here, but the crisis in the gas market spurred a sharp rise in the price of natural gas, which increased Russia’s income from natural gas.
Before the summer of 2021, the normal price of natural gas had been just under 20 euros per megawatt hour. After the Russian attack at the beginning of March, the price rose sharply to more than 200 euros.
Yet a sharper rise was ahead in the summer of 2022. At that time, the price briefly jumped to more than 320 euros, when Russia first reduced and then completely stopped gas deliveries in the Nord Stream 1 pipeline. At the end of September, both Nord Stream gas pipelines were also blown up.
After that, however, prices gradually fell. The German government announced large energy support packages. Especially in Germany, gas storages could also be filled quite quickly during the winter, when people were ready to pay a high price for gas.
Of course, it raised the general price level of gas in the fall, but after the stocks were full, gas started to become cheaper.
For now the last high price spike was experienced in December, when both the Nordic countries and Central Europe were exceptionally cold. Then we worried again for a while how the gas would last through the winter and how the stocks could be filled for the next winter.
“But the situation has changed very quickly since then. Natural gas futures prices for this year have fallen sharply. Even next winter, prices will be just over 60 euros per megawatt hour, while at the beginning of December they were around 200 euros,” Paloranta says.
In addition to the mild weather and the rapid increase in LNG imports, according to Paloranta, the decrease in natural gas consumption has also contributed to the price drop. In Central Europe, natural gas is used a lot directly for heating buildings.
“Consumption has decreased by about a fifth. Part of it is due to the mild weather. In industry, gas has also been replaced by oil and, for example, fertilizer production has been completely stopped.”
There is still some uncertainty about next winter. The German Bundesnetzagentur emphasized in its announcement last week that it is of the utmost importance to continue saving energy. Winter is not over yet, and gas has to be taken from the warehouses now.
It is hoped that stocks will dwindle as little as possible.
in Finland natural gas is mainly used in industry and in relatively small quantities. After Russia’s pipeline gas import ended last May, the use of natural gas quickly halved. It started to be replaced with propane, i.e. liquid gas and partly with oil.
Now natural gas is also well available again. Auris has been producing LNG through the port of Klaipeda in Lithuania, and now it would be available through the terminal ship to Inkoo as well.
Natural gas the price is still important for Finnish consumers as well.
It is because Finland is part of the common European electricity market. When there is a shortage of electricity everywhere, the price of electricity in Finland is also determined by the most expensive form of electricity production in Central Europe.
This winter it has been a natural gas condensate plant, i.e. a power plant that produces only electricity with natural gas.
“In Central Europe, the wholesale price of electricity has almost become the same as the wholesale price of natural gas. The decrease in the price of natural gas means that the price of electricity in Central Europe has also calmed down considerably,” says the CEO of Energiauður Jukka Leskelä.
If the price of natural gas is, for example, 55 euros per megawatt hour, it means, according to Leskelä, that the production cost of electricity produced with natural gas is about double, i.e. 110 euros. In terms of price per kilowatt hour, it means 11 cents.
“The efficiency of natural gas condensate power plants is on average around 50 percent.”
With natural gas the cheaper electricity produced means that import and export connections will no longer increase the price of electricity in Finland in the same way as last summer and autumn.
According to Leskelä, it can now be seen as a decrease in the general price level of stock exchange electricity.
“In addition, this year we are breaking away from the price level of Central Europe, because so much new production is coming to Finland and other Nordic countries. Olkiluoto 3 is about to start up at the beginning of February, and there will also be a lot of wind power,” says Leskelä.
On days with little wind, the prices can still be high from time to time, but in general the situation is much better than in autumn or before Christmas.
The drop in stock exchange and futures prices is also reflected in the prices of the electricity contracts on offer. Fixed-term electricity contracts are priced based on futures prices. Now you can get a two-year contract for less than half the price compared to the autumn prices.
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