Surging renewables and mild weather reshape energy landscape

Subdued energy demand and strong renewable generation saw European energy markets experience a typical so-called ‘shoulder’ month in May. These factors combined exerted downward pressure on spot energy prices across the continent, while persistent geopolitical tensions and other idiosyncratic market dynamics continued to fuel uncertainty across the broader European energy landscape.

Several power markets in Europe underwent periods of oversupply, driven by structurally weak demand exacerbated by several public holidays and mild temperatures. On the supply side, robust solar and hydro output combined with a notable rebound in wind power generation after several subdued months. This contributed to a significant decline in spot power prices and triggered new records in negative hourly pricing across several markets. In particular, a combination of unseasonably strong wind generation and weak demand in the UK resulted in electricity prices remaining in negative territory for up to 17 consecutive hours, including a record low of minus £35.2 /MWh. Meanwhile, Spain saw one third of its hourly power prices fall below zero, despite increased curtailment of solar power generation. 

This situation was made even worse by Spain’s inability to export excess solar production to Portugal due to an ongoing stabilisation process initiated by the Portuguese transmission system operator, following the Iberian blackout episode in April. The causes of this event remain largely unknown despite intensive investigations, but the precautionary management of the grid further widened the price spread between the two countries over the remainder of the summer period. Against this background, and in light of the recent extension of export constraints on France’s eastern borders through to August, EDF modulated output from several nuclear reactors during periods of market oversupply. This move contributed to French nuclear availability plunging to a two-year low.

On the fuels front, gas prices found support from supply maintenance schedules during the restocking period. Planned outages at Norwegian fields, as well as at LNG import terminals in France and Belgium, cut the spare supply available for storage injections. This contributed to a widening deficit in EU gas inventory levels built up over the past winter. While storage levels increased from 40% to 49% during the month, the gap relative to the five-year average increased, from 7% to 8% below average. Meanwhile, ample global LNG availability, supported by steady growth in US liquefaction capacity and persistent weakness in Chinese demand, has kept broader market conditions relatively subdued. Against this background, and with coal prices moving sideways amid supply disruptions across key exporters, EUA emissions allowances saw a modest increase. This was further supported by speculative investor activity, while the UK-EU agreement to pursue the linkage of their respective CO2 trading schemes supported UK emissions allowances.

Looking ahead, developments in US-China and US-Europe tariff negotiations will remain a major source of uncertainty across all commodity markets over the coming months, while power markets will be closely monitoring weather conditions that determine the timing and intensity of the cooling season.

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