Europe Energy Crunch to Linger as Power Prices Hit Records

(Bloomberg) -- Europe’s energy crunch is set to last as electricity prices climbed to fresh records, fueling inflation and raising bills for millions of households and industries across the continent. 

Power prices for delivery next year surged over 15% in Germany and almost 14% in France by Wednesday’s market close as freezing weather has forced European utilities to burn more gas, coal and even oil to keep the lights on. High prices this month are spilling into futures contracts for the following years, a sign that the crunch could last longer than many expected.

“There is still a lot of winter left,” said Arne Bergvik, chief analyst at Swedish utility Jamtkraft AB. A cold start will create “high energy prices for the rest of the season as the optionality to use stored gas or hydropower later is lost.” 

The world is facing energy shortages as economies recover from the pandemic, boosting demand. At the same time, supply hasn’t been able to keep up due to years of lower investments in fossil fuels. Europe’s wide network of renewable energy sources has also struggled, with low wind speeds reducing output for most of the year.

German power for next year, a European benchmark, reached 192 euros ($218) a megawatt-hour, while the equivalent French contract surged to as high as 222.75 euros before closing at 222.50 euros. As utilities burn more fossil fuels, carbon prices surged to a record 90.75 euros a metric ton, with options traders betting prices will hit 100 euros before the end of the year. Carbon closed at 88.88 euros.

For consumers, higher gas and power prices are adding to an increase in food and transport costs. Bank of England Deputy Governor for Monetary Policy Ben Broadbent said this week that U.K. inflation may surpass 5% early next year. That could happen as energy regulator Ofgem allows utilities to raise prices for consumers again in April.

Europe has been shifting away from fossil fuels in a bid to reduce emissions, and it has also curbed its use of nuclear power. That’s leaving the continent to rely on renewable power such as wind and solar, which are intermittent sources.

The retirement of conventional power plants that can be quickly turned on and off “is increasing the impact of renewable energy production on market pricing,” commodities trader Trafigura Group said in its annual report. “The structural shift away from coal and nuclear towards wind and solar is also causing severe strains in the power system.”

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