Clement weather and lower consumption: energy prices on the decline

After reaching very high levels at the end of August, gas and electricity prices are now falling again in Europe. The downturn in energy prices observed over the past few weeks is linked to unseasonably mild temperatures and lower consumption.

Electricity consumption down 3-4% in September

Gas and electricity prices have been falling in Europe for several weeks now. This trend is set to continue in October, with prices expected to fall by 60% over the month, according to estimates by business intelligence and energy research company Rystad Energy.

This downturn is primarily due to a drop in consumption, itself linked to particularly mild weather and the implementation of the first energy-saving measures. In addition, wind turbines located in the north of the continent benefited from favorable winds, resulting in increased production.

According to figures from RTE, the French electricity transmission system operator, electricity consumption in September was 3% to 4% lower than in the first half of 2022, and 5% lower than in the pre-Covid period.

The industrial sector is the one that has reduced its electricity consumption the most. However, the 8-9% drop observed at major industrial sites is due less to energy-saving measures than to the economic slowdown. Faced with rising energy prices, some plants have slowed down their activity, or even halted it altogether.

In the tertiary and residential sectors, sobriety measures seem to be bearing fruit: applied from September onwards, the reduction in heating, public lighting and hot water has led to a drop in electricity consumption.


Uneven price variations across markets

Wind turbine production and weather conditions have a particularly strong influence on the short-term market. In France, spot prices - i.e. prices set for immediate delivery - are at their lowest level in months, ranging from 150 to 200 euros per MWh.

Unlike the spot market, which focuses on electricity purchases and sales the day before for the following day, the electricity futures market is made up of purchases and sales for a period ranging from days to years ahead.

The downturn on the spot market has not affected the forward market, where prices remain very high. For annual contracts to be delivered in early 2023, they are reaching 400 euros per MWh in Germany and 550 euros in France.

On the spot gas market, prices have fallen even more sharply. They are 5 times lower than at the beginning of September, and currently stand at around 60 euros per MWh. The downturn is also noticeable on the futures market, with an average of 117 euros for November.

Lower gas prices are also due to a weather-related drop in demand, and high storage levels. In 2021, over the same period, gas reserves in Europe will average 77%, compared with 92% today.

To compensate for the drop in Russian gas deliveries, Europe has turned to liquefied natural gas (LNG) and signed an agreement with the United States to secure its access to this resource. Europe also obtains its LNG supplies from Qatar, Algeria, Norway, Egypt, Nigeria, Israel and Australia, ensuring that it is not solely dependent on Russia.

However, the more Europe limits its dependence on Russian gas, the more prices will fall, which nevertheless presupposes agreement between the various member countries on sources of supply.