Wind Conditions Are a Crucial Factor in Europe

The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.  

 

In Europe, coal-fired power generation has expanded 21% y-y on both soaring natural gas prices (following Russia’s invasion of Ukraine) and decreased wind power generation.

Europe’s coal consumption is growing

Between the breakout of the Russia-Ukraine war on Feb 24 and now (May 17), EU member countries have generated an estimated 99.6TWh (+21% y-y) of energy from coal-fired power plants. Gas-fired generation contracted 5% y-y to 97.3TWh. Nuclear and wind power generation declined to 135TWh (-20% y-y) and 88.5TWh (-1% y-y), respectively, as: 1) France’s nuclear power plant utilization rate has remained low since Dec 2021; and 2) wind conditions in Europe were unfavorable for wind farms in May. We note that operations at some of France’s nuclear power plants have remained suspended since Dec 2021 after facility defects were identified.

Although aiming to achieving carbon neutrality, EU member states have upped their coal power generation, reacting to both higher natural gas prices and maintenance work at nuclear power plants. It is disappointing that economic factors are being put ahead of the EU’s principle of reducing reliance on coal power. But, Europe’s coal power generation is likely to stay high for now if: 1) natural gas prices remain strong in the region, affected by both Russia’s insistence upon gas payments in rubles and supply-demand imbalance in the LNG market; and 2) normal operations do not resume at nuclear power plants. Meanwhile, Europe’s coal supply setbacks are likely to worsen if the EU bans coal imports from Russia, starting from August.

Wind conditions are a crucial factor in Europe

Over May 1~17, EU member states’ wind power generation tumbled 28% y-y to 12.6TWh. In response, they expanded their gas and coal generation by 9% and 27%, respectively. According to Ørsted, when wind power generation utilization rates were low in 2H21 due to weak wind conditions in Europe, natural gas prices jumped in line with increased demand for natural gas. If this pattern repeats in 2H22, uptrends in natural gas demand and prices will likely accelerate.

Wholesale electricity prices have stabilized in Europe; remains unclear how they will unfold in 2H22

To date in May, Germany’s wholesale electricity is trading at an average of over US$200/MWh at the European Energy Exchange (EEX). After soaring to US$530/MWh in the wake of Russia’s invasion of Ukraine, the price has since stabilized. But, as natural gas prices, the key determinant of wholesale electricity prices, are expected to remain strong in 2H22, a price rebound appears highly likely.

 

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