The invasion of Ukraine by Russian armed forces resulted in a dramatic increase in electricity prices in Europe. As a result of the war in Ukraine, prices of German power futures (calendar year 2023) had risen by >30% on Thursday, 24th Feb vs a week ago, reaching 182 EUR/MWh. This was a direct result of market participants’ perceptions that the risk of a gas supply disruption from Russia to Europe had greatly increased.
Market participants are anticipating 3 possible scenarios following the invasion of Ukraine by Russian forces:
- Low Case (probability 10%). A short-lived and small-scale invasion, with a limited number of casualties over a number of days. The diplomacy prevails and there are no sanctions evoked towards energy supplies from Russia. The Nord Stream 2 (NS2) pipeline goes online as previously planned in Q3-22. Under this scenario, if the Russian gas premium is removed, we can expect the power market prices fall 30-40% in Q2-22.
- Moderate Case (probability 30%). A short-lived, military invasion that lasts for several weeks with new sanctions on Nord Stream 2, but where Germany continue to pay for long-term contracted gas through Nord Stream 1. The certifications of NS2 is suspended until Winter 22. Under this scenario, the gas prices can re-test the previous market high last seen in Dec’21 at 140 EUR/MWh only falling back 30-40% later in the Summer-Autumn 2022 if the conflict in Ukraine ends.
- High Case (probability 60%). A sustained, full-scale invasion with heavy artillery and a large number of casualties, lasting for several months could result in heavy sanctions from the World. Russia may then completely halt the supply of gas, oil, and coal to Europe. Under this scenario, Europe can lose 40% of its gas supplies while the loss can’t be fully replaced by LNG gas. NS2 gas pipeline would be permanently canceled. Under this scenario, the gas and power prices will continue increasing during the invasion with the risk of gas and power shortages next Winter 22. Gas prices can reach well above the prior highs of Dec’21 and only fall in 2023 when the supply-demand balance is restored.
With Germany’s recent announcement that Russia’s access to the SWIFT system has been suspended, it’s safe to assume that option 3 is more likely to occur. This is the worst-case scenario, as it is projected that, despite the end of a very mild winter, Russian gas flow will not be fully balanced by LNG imports, and competition for a decreased source of supply would drive up gas prices. This condition may persist well into the next winter season.
What is the effect of the war in Ukraine on the economy?
If this 3rd Scenario was to materialize, we can see TTF+1 future gas price more than double from the current level of 62 EUR/MWh. And because costs of gas play a major role in the marginal cost of electricity generation in Europe, we can see the European power price futures increase by 100 to 150 EUR/MWh from the current market level. This would mean that the price of German power future (calendar year 2023) can go up to 280 – 330 EUR/MWh.
If you are interested to learn more about the European gas market crisis, please read my other article here. You can also check out my weekly power market reports here if you wish to stay connected to the latest news, power trends and forecasts.
Liked this article? Please leave your comment below. This means a lot to me and it motivates me to continue my research work about future energy market trends and developments.
Curious to learn more about PPAs? Our guide offers a concise roadmap to navigate Power Purchase Agreements (PPAs). Learn more here.
