Year to date, we have observed a strong decline in energy prices resulting in a strong underperformance of the listed European utilities. The reason for this steeper-than-expected decline in energy prices includes a substantial drop in carbon costs coupled with a reduction of other input costs.
EUROPEAN DEPENDENCY ON US SPOT LNG
Liquefied Natural Gas (LNG) refers to natural gas (mainly methane) that has been cooled to a liquid state in order to make it easier and safer to transport and store. The main LNG players are major international & National oil companies due to their strong financial and political resources.
Gas prices have halved since November 2023, dropping from around 14$ per Metric Million British Thermal Unit (mmbtu) to approximately 7$ in February 2024. This decrease is also reflected in the Dutch Title Transfer Facility (TTF) benchmark for European gas prices which has fallen from 42€/MWh to 25.2€/MWh over the same period (-48% yoy).
Europe is highly dependent on US spot LNG which accounted for almost 50% of its 2023 total LNG imports with 120 billion cubic meters (bcm). The floor price for sourcing this LNG depends on market supply dynamic and is thus directly linked to US Henry-Hub spot prices.. In a tight LNG market, the floor price (which includes liquefaction, transport, and regas fees) will be higher, whereas in an oversupply market, the floor price level will be lower (at the marginal cost of US LNG).
With limited short term LNG capacity additions and a rebound in Chinese and South-East Asia, the supply of LNG is expected to tighten until H2 2026. To that extent, demand ability to meet following mid-term massive capacity increase (c150 additional million ton per annum from 2026 to 2028) will be key in European energy price determination.
TOWARD POWER PRICE NORMALIZATION ?
By setting marginal generation costs, ongoing gas dynamic and the added supply from nuclear and hydro sources could influence short-term power price dynamics. Additionally, the increasing development of renewable energy assets will also have a significant impact on the energy mix.
The sharp year-to-date decline in wholesale power prices could pressure European utilities’ margins beyond 2024 as the high-priced hedges secured during the energy crisis gradually expire.
