The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. — Ed.
Europe’s energy crisis woes should lessen on reduced electricity demand stemming from both abnormally high winter temperatures and improved wind conditions. Even if the remainder of the winter season becomes colder, we expect the normalization of nuclear power plant operations to contribute strongly toward stabilizing energy prices. And, we note that LNG prices have fallen to the level before the outbreak of the Ukraine-Russia war.
Electricity demand dropped sharply in 2022
In 2022, electricity generation in Europe recorded 2,518TWh (-4% y-y), returning back down to the 2020 level. The amount of power generation in 1H22 was similar to that in 2021, but the amount of power generation in 2H22 (when it was difficult to import LNG from Russia) fell sharply to 1,215TWh (-7% y-y). The economic slowdown caused by both interest rate hikes and the nuclear power plant facility defects were also factors in the electricity demand decrease.
Europe’s power generation in 2023 should remain at the level of 2022, considering energy reduction policies and economic recession amid the ongoing energy crisis. That said, the utilization rate of fossil fuels is projected to drop from 34% in 2022 to 32%, returning to the 2020 level. For reference, power generation from coal accounted for 13% in 2020, 15% in 2021, 17% in 2022.
Abnormal temperatures detected since late Dec 2022
Over Dec 20, 2022~Jan 7, 2023, electricity generation in Europe fell sharply to 124TWh (-14% y-y) amid unusually high winter temperatures. According to media reports, the unusually high temperature in Europe is caused by a warm air mass from the west coast of Africa crossing Europe.
Electricity demand in Europe tends to be high in the winter and low in the summer. But, Europe is overcoming the energy crisis caused by the Ukraine-Russia war, helped by a lessening in winter-time demand for electricity. Higher temperatures also improved wind power generation. Over Dec 20 2022~Jan 7 2023, wind power generation increased significantly to 31.3TWh (+15% y-y).
When will Europe’s energy crisis end?
Over Dec 20~Jan 7, coal and LNG power generation in Europe fell to 17.8TWh (-26% y-y) and 13.7TWh (-41% y-y), respectively, responding to reduced electricity demand and increased wind power generation. The European LNG price (Dutch TTF) recorded US$21.7 per MMBtu on Jan 8, 2023, returning down to the level seen before the outbreak of the Ukraine-Russia war.
If the rest of the winter season gets colder, electricity demand may rise, but considering the increased operation of nuclear power plants, Europe is expected to safely overcome its energy crisis. Unless unexpected geopolitical risks arise, LNG and coal prices are unlikely to surge.
