By Michalis Psylos
“Europe will spend the winter like a tightrope walker trying to walk between two skyscrapers, balancing on a tightrope.” This is the warning of Jack Sharples, a researcher at the Oxford Institute for Energy Studies, in an analysis published by the famous British university. ” If the conditions for the European “tightrope walker” are positive, the undertaking is possible, even if it is stressful. If not, Europe could be attacked by strong winds, with the most likely evolution being a free fall!
The warning of the British researcher finds Europe with the Russian pipeline closed since yesterday Nord Stream 1, for three days and for maintenance purposes. With natural gas storages 80% full, but with prospects showing that Russian pipeline supply will remain limited in the winter. The balance of the European market will rest on the availability of LNG cargoes, the return to climate-destructive coal and the ever-dangerous nuclear power. Moreover, renewable energy sources are far from meeting European energy needs in the medium term.
The most important cause of course for the energy crisis in Europe is the ongoing war in Ukraine and the impact on the EU of the sanctions against Moscow. Also contributing to the sharp rise in prices are reduced supplies of oil and coal in Europe, which are very important for the production of electricity. But especially in the north and central, the low-due to the drought-water level in the largest rivers makes the operation of nuclear plants problematic (France) while for example on the Rhine, barges cannot sail with a full load of coal to feed the power plants. France – which could rely on its 19 nuclear plants – faces high prices as a third of its reactors are under maintenance.
The perfect storm
The “perfect storm” is complete with skyrocketing increases in the price of natural gas, which portends a very harsh winter. Natural gas is the most used fuel for power generation, and electricity prices have risen on energy exchanges to all-time highs. As reported by the Financial Times, the price of electricity in Europe has increased tenfold compared to the average of the last ten years, combined with a 14-fold increase in the cost of natural gas. For this reason, more and more EU countries are calling for the decoupling between the price of natural gas and the price of electricity. “We have to stop this madness that is happening right now in the energy markets and it can only be done with a European solution”, stressed Austrian Chancellor Karl Niehammer and added: “We have to decouple the price of electricity from the price of natural gas ». The issue will of course dominate the meeting of energy ministers on September 9, as the president of the European Commission, Ursula von der Leyen herself, confirmed that the EU is preparing “an urgent intervention and a structural reform of the energy market”.
“The Rain Dance”
The establishment of a ceiling on the wholesale price in Europe will strengthen the national and collective interests of the EU, against speculative “appetites”. Why else – for the EU to “observe” the market, waiting to solve the problem it has caused on its own, is like dealing with drought and water shortages, like the Shamans: With the “rain dance”.
Many experts even warn of a risk of a repeat of the phenomenon of so-called “paper barrels” of oil, before the great financial crisis of 2008. When, for example, for one real barrel of oil traded, 100 barrels of futures contracts were traded on the New York market. . When the contracts expired, only the price difference was paid, with no actual movement of the product. These contracts then created the impression of gigantic demand compared to limited supply and, consequently, reinforced the expectation of a sharp rise in the price of oil.
How is the price determined?
The wholesale cost of electricity reflects the price of the last unit of energy purchased through auctions held in the Member States and currently reflects the price of natural gas and not from renewable energy sources. There are also technical reasons that raise the price of electricity. In Italy for example, almost half of the national electricity is produced in gas-fired thermoelectric plants. However, the electricity market in Europe is a complex system.
The price per kilowatt hour depends on many factors. When the prices of natural gas fall, this is directly reflected in the reduction in the price of electricity: For example, in Germany the price of electricity fell yesterday by 20%, while in other countries of central Europe from 7-17%, within one day. In Greece, however, the price of electricity emerges at the same time as the most expensive in Europe. However, electricity prices had risen before the international energy crisis and the factors are many: speculative episodes in the Energy Exchange, structural problems and distortions of domestic competition, but also some inherent problems from the primacy of natural gas. The pricing of natural gas in our country is also based on the average of the previous month and not based on the current day’s market price of the TTF, on the Amsterdam stock exchange.
This means that when natural gas prices rise, Greece will show a better electricity price than the rest of Europe. On the contrary, when natural gas prices fall, this fall is slow to be reflected in electricity prices, which remain high for more days than in the rest of the markets in Europe.
The Amsterdam Stock Exchange
All eyes are therefore on the so-called TTF, Europe’s leading energy trading platform, located in Amsterdam. The Netherlands is a central hub for the European market allowing natural gas to be transported via pipelines between countries such as France, Germany, Norway, Italy and Great Britain.
The TTF (Title Transfer Facility) is a virtual market (a hub) for the natural gas market. Along with Nymex (New York Mercantile Exchange) and Ice (Intercontinental Exchange) in Atlanta, which specializes in OTC energy derivatives contracts, it is one of the main reference markets for gas trading in Europe..It was created in 2003 as alternative to UK trading platform National Balancing Point. The TTF gained importance with the liberalization of the energy sector and is now considered the benchmark for the monitoring and mechanisms of the European natural gas market.
Today, more than 14 times more natural gas is transported through the TTF than is consumed in the Netherlands. As in any other free market, prices in the Dutch hub are determined by the basic economic rules of supply and demand. TTF offers traders two main options:
They can buy gas with immediate delivery or sign so-called futures contracts This spot market, very volatile like all its counterparts, has gradually replaced long-term bilateral contracts between countries.
It allows not only wholesalers, but also financial traders, to set the price of futures in hedge funds to “bet” on the TTF exchange, creating an artificial shortage or exploiting energy supply problems