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Winter is already over for Europe's energy markets


WINTER is already finished for Europe's energy markets, where the cost of electricity and the fuels that make it have been plunging for the past few weeks.

Unseasonably warm temperatures across the continent have slashed demand for heating, prompting power contracts to tumble and making natural gas and coal unprofitable to burn in some places.  Temperatures in Britain topped 21 degrees Celsius earlier this week. That is a sharp contrast from a year ago, when a cold snap known as the "Beast from the East" sent gas prices to their highest in at least a decade. 

"To get temperatures above 20 degrees in winter is a very iconic threshold," said Graham Madge, a spokesman for the Met Office,  the UK's national weather agency. "We've never seen this before."

While temperatures should return to their seasonal norm towards the end of next week, they have already upended the gas and power markets. The heating season started in October with prices above their five-year average across Europe, reflecting concerns that a few cold snaps could leave utilities short of supplies. Now, the industry has enough gas in storage that it is bracing for a glut - and lower prices.

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The next-month German power price slumped 37 per cent since the start of the year. While that is still some seven euros (S$10.77) above the five-year average, the outlook is for more declines in the coming weeks - judging by historical prices in March. Shares of big power generators from RWE AG to Electricite de France SA have also dropped in the past week.

"Mild winter tends to hurt unregulated power generators and energy suppliers by curbing demand and wholesale prices," said Elchin Mammodov, an analyst at Bloomberg Intelligence. "These utilities try to address such risk with forward hedging, operational efficiencies and by selling more energy than they produce."

The declines stretch deep into energy markets. Coal for delivery in north-west Europe, which touched US$100 briefly at the start of the heating season, has been in near free-fall since and traded below US$76 a tonne this week.

The front-month Dutch gas contract has dropped to its lowest since September 2017 as the mild weather trimmed demand and shipments of liquefied natural gas (LNG) to Europe surged to record levels.

European gas prices have plunged by 40 per cent since September. And even if they fall by another 40 per cent, Europe's second biggest supplier would still be producing at similar levels, according to Tor Martin Anfinnsen, senior vice-president for marketing and supply at Equinor ASA.

There is little to cushion the declines, since big suppliers are reluctant to be the first to cut output. Equinor figures that it can deliver cheaper than either LNG or Russian pipelines.

"We should be the last one to give because we are in the most competitive position," Mr Anfinnsen said. It does not make financial sense to curtail output to keep prices high. Any loss of revenue cannot be made up until decades in the future, he added.

Another sign of softness is emerging in the carbon market, where polluters pay for credits that offset their emissions. Those certificates have retreated from more than 25 euros a tonne at the start of the year to about 21 euros on Wednesday. 

"Carbon has been speculatively driven, and now it is starting to fall because of the weather and global macroeconomic concerns," said Wayne Bryan, senior European energy and commodity analyst at Alfa Energy. BLOOMBERG

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