Heatwave drives front annual prices

Tuesday 16th August 2022

Gas and power prices have surged to renewed highs, with the massive risk associated with Russian gas flows for the coming winter season. The prolonged heatwave has also affected things, with increased cooling demand putting greater strain on gas-fired generation. The dry weather has also significantly reduced the levels of pan-European lakes and rivers, compromising hydroelectric power generation, nuclear cooling and even affecting coal deliveries on Rhine barges.

The question of gas continues to dominate discussions, with storage levels closely monitored and concerted efforts to reduce consumption levels. Without a steady flow of gas, so other forms of generation are more impacted. Hence when wind levels drop, so short-term is spiking more dramatically. As mentioned before, coal is becoming increasingly important in the mix as a substitute for gas. This is now having a knock-on to the recently subdued carbon markets – coal-fired generation emits more CO2 so carbon allowances are thus more in demand.

A possible brake on surging prices is offered by crude oil. The Brent index is well off the highs of two months ago, and is probably indicative of pending recession. A recession should release gas and power back to markets and thus reduce prices. There is also expected to be a bearish effect from the huge surge in domestic prices for the coming winter. People will of course use less gas and power as prices increase. However, traders are unsure of the extent of this reduction of consumption or the kWh values involved as the domestic price charges are entirely unprecedented.