With European energy use set to peak over the coming months due to higher heating demand during winter, power costs could climb further. — Reuters
WHOLESALE power prices across key economies in mainland Europe have climbed to their highest levels in over a year, dealing a fresh blow to the region’s businesses that are already battling weak demand and fragile consumer sentiment.
Average wholesale base power prices in Germany, France, the Netherlands, Spain and Poland have climbed to their highest levels in at least 20 months so far in November, according to power market data compiled by LSEG.
Power prices in Italy have only climbed to four-month highs, but are already the highest among major continental European economies and so have helped lift the regional power price average to the highest since February 2023.
With European energy use set to peak over the coming months due to higher heating demand during winter, power costs could climb further.
That could create fresh headwinds for regional economies that have struggled to grow since Russia’s invasion of Ukraine in 2022 upended regional power markets and lifted average energy costs throughout Europe.
The change in average European wholesale electricity prices since Russia invaded Ukraine in February 2022 underscores the scale of the energy cost rise seen in key countries.
In Germany, Europe’s largest economy and top manufacturer, wholesale electricity prices since March 2022 have averaged €138 per megawatt hour, according to data from Ember.
That average is 280% more than the average from 2016 through 2019, and so means that German electricity consumers have paid nearly four times more for their electricity since Russia invaded Ukraine than during the 2016 to 2019 period.
Such a dramatic jump in energy bills has impacted every energy consumer in the country, and forced all energy intensive businesses to throttle back on power use.
France, Italy and The Netherlands have also recorded over 200% jumps in average electricity costs over the same time frame. Poland’s electricity costs have jumped 180%, and Spain’s 103%, Ember data shows.
The downturn seen in the German economy’s massive industrial base has captured the wider impact of higher power costs across Europe.
Production of energy-intensive products such as steel, chemicals and fertilisers tumbled to record or multi-year lows in the aftermath of Russia’s invasion of Ukraine and has barely recovered since, according to LSEG data.
Output of manufactured products has also been affected, with production of turbines and engines holding around 30% below the previous output peak.
Even Germany’s famed automobile sector - a major employer throughout Europe - has chopped new car production by over 30% from pre-Covid levels as high power costs plus stiff competition from China and other rivals battered producers.
This collective industrial downturn has in turn taken a toll on national and regional economic growth.
Germany’s gross domestic product has expanded by only 0.4% a year since 2022 compared to an average annual growth pace of nearly 2% from 2010 through 2019, according to the International Monetary Fund (IMF).
Poland, The Netherlands and France are all also on course to report substantially lower growth in 2024 than the 2010 to 2019 average, IMF data shows.
To try to offset the impact of reduced supplies of natural gas from Russia and higher overall power prices, countries across Europe deployed record volumes of clean power since 2022.
Over the first 10 months of 2024, electricity generation from clean sources was up by 11.5% from the same months in 2022, to a record 2,450 terawatt hours (TWh), according to Ember.
Generation from fossil fuels was down 16% since 2022 to 1,452 TWh, thanks to a 21% cut to coal-fired generation and a 14% drop in gas-fired output.
However, total electricity generation remains below 2022 levels, as several countries have struggled to replace all the lost fossil fuel output with generation from clean power.
Somewhat aiding the power sector has been the fact that the enduring downturn in industrial activity across Europe has meant that most power systems have not needed to generate as much power as was consumed in 2022.
Going forward, however, many of Europe’s major industrial segments are under pressure to ramp up activity, especially from local governments who are keen to avoid further job losses and to boost tax receipts.
But in order to lift output companies must be able to afford the extra energy required, which is not guaranteed if power prices continue to press higher in the months ahead.
Some of Europe’s most profitable enterprises may be able to stomach rising energy bills as long as consumer demand remains firm.
But for those cost-conscious sectors that remain under pressure from international rivals and still-weak consumer demand, higher power prices could force further cuts to output that could stall economic momentum. -- Reuters
Gavin Maguire is a columnist for Reuters. The views expressed here are the writer’s own.
