Unprecedented power prices seen as Russia cuts gas flows

Monday 1st August 2022

UK and European power and gas markets suffered further shocks in the second half of July, with Russian gas flows west again being the main driver. The main Nord Stream pipeline from Russia to Germany came back on line after maintenance, but only at 40% capacity. This has since been reduced to 20%, sparking renewed spikes in market prices. The costs for the coming winter season are at record levels, and there does not seem to be much respite in market direction.

There is the general consensus now that Russia has weaponised energy and Germany’s overreliance on a single, unreliable provider is causing knock-on issues across the continent. Measures are being taken to actively reduce gas consumption by 15% across the EU, and steps are being taken to restart coal-fired power stations to take some of the burden from gas. However, the EU Russian coal ban has now kicked in, so this does not offer huge value to the market.

At the same time as the gas flow question is hitting medium-term markets, the short-term has seen a lot of volatility due to intermittent renewable output – this was particularly pronounced during the recent heatwave when National Grid had to briefly buy power from Belgium at a record £10,000/MWh, although for July overall, the UK was a net exporter to Belgium.

Gas storage levels in Europe do remain good versus the 5-year average, but this is really just a crumb of good news in a massively bullish market.