Market outlook

In the third quarter, the electricity market was characterised above all by exceptionally high temperatures and the associated impacts on the European energy system. Several heatwaves led to a significant rise in electricity demand across Europe, driven in particular by the increased use of air conditioning, including in data centres. At the same time, the availability of French nuclear power stations was restricted by high cooling water temperatures. Low water levels also hampered hydropower generation and energy logistics. At the same time, volatility increased: high solar generation put downward pressure on prices during certain hours, whilst periods of low wind caused prices to move in the opposite direction. Further driven by geopolitical risk premiums and rising gas, coal and CO₂ prices, the front-year electricity contract (Cal-27) rose over the course of the quarter from around 95 EUR/MWh to approximately 120 EUR/MWh, reaching its highest level in several years.

The gas market remained the key driver of market trends in the third quarter as well. Discussions regarding the security of LNG supply chains, shipping through the Strait of Hormuz being severely restricted or completely halted at times, and ongoing LNG supply disruptions in Qatar led to significant price fluctuations. At the same time, European storage levels came increasingly into focus. Despite ongoing injection into storage, levels during the summer were below those of previous years and, in some cases, more than 15 percentage points below the five-year average. This led to a significant risk premium: the TTF Forward 2027 rose from around 36 EUR/MWh at the start of July to just under 53 EUR/MWh at the start of September. Spot trading on the gas market has also been affected by competition from Asia for US LNG volumes and rose to a three-year high of 73 EUR/MWh at the start of September.

The coal market, too, was influenced by developments in the gas markets during the third quarter. The historically low water levels on the Rhine led to restrictions on inland waterway transport, thereby hampering the transport of coal to power station sites. At the same time, high gas prices significantly improved the competitiveness of coal-fired power generation, meaning that the so-called ‘clean-dark spreads’ offered considerable advantages over gas-fired power stations at times. This was further supported by the fact that European utilities began to fill their gas storage facilities. Despite its structurally declining importance within the European energy system, coal thus temporarily regained significance as a hedging instrument against high gas prices and supply risks during the winter months. The API2 Cal-27 rose from 112 USD/tonne at the start of July to around 132 USD/tonne at the start of September.

In the market for emission allowances (EUAs), the focus in the third quarter was not only on fundamental data but, above all, on political developments. Discussions regarding the reform of the European emissions trading scheme, the structure of the Market Stability Reserve (MSR), possible additional allowances under an ‘investment booster’, and adjustments to the long-term reduction pathway all contributed to market volatility. At the same time, rising electricity, gas and coal prices provided support for the market, as higher fossil fuel generation costs increase demand for emission allowances. Overall, the prevailing view was that, despite political adjustments, the European emissions trading scheme would remain a structurally tight market in the long term. The EUA Dec-26 rose from around EUR 80 per tonne at the start of July to approximately EUR 83 per tonne at the start of September.

The oil market proved volatile in the third quarter. The military escalation in the Middle East and the significant restrictions on shipping through the Strait of Hormuz caused risk premiums to rise sharply. In addition, alternative transport routes such as Bab al-Mandab came into the focus of market participants. Falling global demand forecasts from the International Energy Agency (IEA) and hopes for diplomatic solutions had a temporary dampening effect on prices. Furthermore, some major oil-producing countries announced an increase in their production volumes. Attention was drawn to the agreement between the US and Venezuela on the development and utilisation of Venezuelan oil reserves. Brent was still trading at around USD 76 per barrel at the start of July and reached levels of over USD 100 per barrel at one point, before the price eased again in early September to stand at around USD 95 per barrel. A significant geopolitical risk premium remains in the market.

Outlook

European energy markets are entering the fourth quarter with higher price levels. Despite a certain degree of normalisation, developments in the third quarter show that the fundamental impact of geopolitical conflicts remains significant. In particular, low European gas storage levels, uncertainty over LNG supply flows and high dependence on global transport routes remain key risk factors for winter supply. Furthermore, the availability of French nuclear power remains a decisive factor for security of supply in Europe. The bullish fundamental factors, such as geopolitics and gas storage levels, are counterbalanced by the ongoing expansion of wind and solar energy, rising storage capacities and investment in grid expansion and flexibility options.

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