Global macroeconomic headwinds outweigh Europe's wind deficit

Over the past month, European energy markets have largely tracked the bearish global macroeconomic outlook, driven by an escalating trade war, stagnating industrial activity, and uncertainty surrounding global economic alliances, which has overshadowed region-specific bullish fundamentals.

In the power sector, the continuation of unusually low wind output across most European markets continued to increase reliance on dispatchable thermal generation. This led to notable price spikes, with German hourly spot prices reaching up to 140 EUR/MWh. However, France experienced a low-priced April, supported by robust nuclear generation, improved hydrological balance, and reduced exports to Germany and Belgium. Further west, the Iberian Peninsula faced a severe power outage after the sudden loss of 15 GW of generation within five seconds. This led to an automatic disconnection from France and the broader European grid. While investigations by ENTSO-E, TSOs, and other stakeholders are ongoing, the incident served as a reminder of the growing share of intermittent renewable energy in the capacity mix. Even if the results of the investigations remain to be seen, the incident highlights the urgent need for grid reinforcements and greater power system flexibility, such as battery storage, to enable effective system balancing and enhance grid reliability.

Grid congestion again came under the spotlight with ENTSO-E's long-awaited review of power price bidding zones, which proposes splitting the Germany-Luxembourg zone into five separate areas, a move projected to deliver several million Euros in social welfare gains. The proposal, however, faced strong criticism from German TSOs, which contend that the analysis is based on outdated data and overlooks progress already made in grid expansion. Berlin now has six months to decide whether to adopt the recommendation or propose an alternative solution. Meanwhile, Germany’s newly appointed Economy and Energy Minister, Katherina Reiche, called for a ‘reality check’ on the country’s renewable energy expansion, emphasising the importance of aligning wind and solar growth with grid development to ensure system reliability.

On the fuels side, recent policy moves to revise European gas storage targets, combined with incentive schemes in countries like Italy and a weak macroeconomic outlook, have deepened the 2025 contango, reinforcing incentives for storage capacity allocation across the region. European gas storages entered May less than 40% full, and 23% below last year’s levels. But increased global LNG supply and subdued Chinese LNG demand are expected to make more LNG volumes available to Europe at lower prices than earlier this year. Supply risks, however, remain, including potential disruptions from LNG and regasification maintenance, as well as rising competition from Ukraine’s low inventories and Egypt’s growing demand. Despite declining gas prices and favourable coal-to-gas switching in the power sector, EUAs recovered from earlier weakness, supported by lower wind and hydro power generation. UKAs followed a similar upward trend, driven largely by renewed speculation over a potential UK-EU ETS linkage at the upcoming UK-EU summit on 19 May.

Looking ahead, European energy markets will closely monitor developments in US-China tariff negotiations, ongoing discussions between the European Parliament and the EU Council of energy ministers on gas storage regulations, and the EU’s proposed ban on Russian spot gas and LNG by the end of 2025 and contracted volumes by 2027. Meanwhile, global trade uncertainty continues to complicate the monetary policy landscape, with the US Fed holding rates steady, Switzerland edging closer to negative rates, and Japan standing out with rate hikes.

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