Europe’s power market bounces back

Power prices recover to 2011 levels

In 2019, Europe's power prices are expected to be at their highest since 2011, having clawed back the losses accumulated in the past 10 years. The annual average base-load contract is expected to exceed €50/MWh in Germany in 2019, up €6 since 2018 and €20 from the low point of €30/MWh in 2016. At €52/MWh and €54/ MWh, prices in France and Spain, respectively, will trade €14/MWh over their 2016 low. All western European continental prices will trade over €50/MWh, except for Nord Pool. Base-load prices will be highest in Great Britain, at €61/MWh.

Third consecutive year of power demand growth

EU28 power demand has been rising-albeit very moderately-since 2015. In 2019, power demand will increase for the third consecutive year, with growth averaging 0.5% across the EU28, confirming that the market fundamentals are, once more, solid. In 2019, EU28 power demand is expected to be 2,790 TWh, a level similar to that of 2005 and 3% below the high point of 2008.

Growth will be strongest in eastern Europe; nevertheless, demand growth will be positive in all western European countries aside from the United Kingdom. Rising demand from the industrial, commercial, and transportation sectors will outweigh the continued decline in residential demand.

10% of renewable additions could be financed by PPAs

In 2019, the volume of renewable capacity built without government support will increase sharply as developers and consumers enter corporate power purchase agreements (PPAs). IHS Markit analysis suggests that 10% of new additions could be financed this way. Since 2008, Europe has added 235 GW of net renewable capacity. In 2019, another 27 GW of renewable capacity will be connected to the grid, substantially above the 10-year average. In Spain alone, 4 GW of new renewable capacity will be added: IHS Markit analysis has shown that 25% of this capacity could be financed thanks to PPAs.

Regulatory framework for the coming years now known

As of 2019, both the framework for the operation of the power market and the energy and climate targets that the European Union is obligated to meet are now clear. The European Union has approved, or will approve shortly, a series of directives to deliver the energy transition as envisaged by the Clean Energy Package.

Notably, the European Union set a renewable energy target of at least 32% and an energy efficiency target of at least 32.5% in 2030. Interconnection capacity between member states will have to rise to 15% by 2030. The package also sets out rules for the participation of renewables in power markets, ensuring security of electricity supply and capacity support.

End of the road for coal in Europe

Europe's coal plants operate under a ticking clock. At the very end of 2018, Europe reached an agreement to include in the new Electricity Directive a clause stating that power plants emitting more than 550 grams of carbon dioxide per kWh will not be eligible for capacity payments as of 2025. Most of Europe's hard coal and lignite plants fall under this ruling, apart from some Polish plants that may benefit from an extension. Starting in 2025, Europe's coal plants will be fully exposed to the wholesale market, with the safety cover of capacity revenues no longer available. The outcome of this decision will not be uniform: some low-cost and well-located assets may endure; nevertheless, the loss of capacity revenues is an unforgiving blow for many.

In addition, political pressure on the coal industry will deepen in 2019. Many countries such as the United Kingdom, France, and Italy have announced a deadline for the closure of remaining coal plants. Germany is currently considering the future of its coal fleet: a proposal is expected in early 2019. IHS Markit estimates that 5.7 GW of coal capacity in the EU28 will close in 2019. In 2030, total installed capacity will have halved, to 71 GW, of which 20 GW will be located in Poland and 27 GW in Germany.

Learn more about our coverage of the European power market.

Coralie Laurencin, Director at IHS Markit

Catherine Robinson, Executive Director at IHS Markit

Posted 14 January 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.