European energy prices soar as a deep freeze arrives

[BRUSSELS] Europe is bracing for energy shortages as freezing weather sets in, boosting demand and sending prices surging at a time when supply just can't keep up.

Temperatures are forecast to fall below zero degrees Celsius in several European capitals this week, straining electricity grids already coping with low wind speeds and severe nuclear outages in France. To make matters worse, Russia is limiting natural gas flows through a major transit route to Germanyon Monday after capping supplies over the weekend. The route is set to be only partially used in January.

Energy prices have spiraled this year, with European gas surging some 600 per cent. The region's benchmark gas contract climbed as much as 8.8 per cent Monday, while German year-ahead power, a benchmark in Europe, rose as much as 3.1 per cent to a new record of US$282 a megawatt-hour.

Short-term electricity also jumped, along with the cost of using dirtier energy sources in Europe. In France, day-ahead power rallied to 442.88 euros (S$683.7) per megawatt-hour, the highest since 2009, in an auction Monday. The German contract also soared to the highest on record. Carbon permits jumped 6.2 per cent to 77.84 euros a ton.

Rising prices have fueled inflation, a headache for policy makers already contending with the spread of the Omicron virus variant just before the holiday season. Geopolitical tensions between Russia and Ukraine could also make things worse, with a potential invasion likely to send prices even higher.

Jeremy Weir, chief executive officer of commodities trader Trafigura Group, last month warned that Europe could experience rolling blackouts in case of a cold winter. That was before Electricite de France said it was halting reactors accounting for 10 per cent of the nation's nuclear capacity, leaving the region at the mercy of the weather at the height of winter in January and February.

Benchmark Dutch gas prices jumped to almost 149 euros a megawatt-hour, the highest for a most-active contract since Oct 6. The futures pared some of the gains after Gazprom PJSC booked about 21 per cent of the Yamal-Europe pipeline to Germany for January at a month-ahead capacity auction Monday.

Though limited, it's a change from the less predictable daily auctions the exporter opted to use for December. The auction results "will not ease the risk of very tight supplies - given limited bookings for now," said Ole Hansen, head of commodity strategy at Saxo Bank. "But with a market clutching straws every little helps."

With nuclear outages biting, electricity producers will have to use more gas to keep the lights on. Russia plans for gas flows into Germany via the key Yamal-Europe pipeline to remain capped, potentially forcing Europe to rely on its already depleted inventories. Storage sites are only 60 per cent filled, a record-low for this time of year.

Only 4 per cent of capacity was allocated for Monday to send gas through Germany's Mallnow station, where the pipeline crossing Belarus and Poland terminates. That compares with about 35 per cent of available space that Russia has booked for most days this month. There's no relief to market tightness in sight as temperatures are expected to remain below normal levels in the UK, Denmark and northern Germany next week.

While traders expect liquefied natural gas may help to some extent, due to lower demand in Asia, cargo diversions will take time and increased arrivals at European ports are unlikely to come before January.

Meanwhile, wind power is expected to stay low in Germany until Dec 23. In France and Britain, generation is forecast to dip on Tuesday, causing further supply issues.

BLOOMBERG