European Power Heads for Most Expensive Year as Sanctions Bite

(Bloomberg) -- German contract for next year, a benchmark for European power prices, rose in sixth consecutive sessions to the highest level this year with rising fuel cost as sanctions limit Russian energy supplies. 

The contract is now trading at the highest level since the market expected a complete cut-off of Russian gas flows at the end of last year, while the underlying future for 2023 is at a record level. A very tight market situation is expected next year as Russia plans to halt gas flows to an increasing number of countries that refuse to pay in rubles, on top of a full import ban set for August of Russian coal by the European Union.

Europe is trying to top up its energy supplies ahead of the winter to limit the worst consequences. Coal stocks in northwest harbors have reached their highest level since October 2020 this month with more deliveries coming in ahead of a ban, while flows of Russian gas continues to refill storage levels, energy consultant Sweco said in emailed note. EU gas storage levels are 46% full, the highest level since the start of the year and close to the 10-year seasonal average.

The attempts are undermined by the growing list of European countries the Russian exporter Gazprom will not send gas to due to refusal to pay in rubles, with Netherlands and Denmark to be added this week. With restock of coal to become dependent on supplies from mainly the U.S., South Africa and Colombia, European coal prices are rising too as “it is far from certain, that these countries will be able to keep up the high exports,” Energi Danmark said in note.

German power for next year added as much as 2.6% to 240 euros per megawatt-hour, the highest level on record for the underlying 2023 contract on EEX-exchange. Daily prices in Germany averaged at 96.81 euros last year, the highest annual level on record, and has so far averaged at 179.40 euros this year on Epex Spot day-ahead exchange. 

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