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Towards an Energy Counter-Shock?
Write by Alexis Gléron and Amélie Janin, may 2024
You have likely noticed that energy prices are slowly but steadily decreasing. Will this drop continue? Will prices return to their pre-crisis levels, or even fall below? And will this trend last?
This article will briefly respond these complex questions.
We are on a market trajectory where a return to pre-crisis levels (40-60 euros/MWh) seems likely. But what factors are at play?
Increase in LNG Export Capacity and High Storage Levels.
Additionally, a new regulation on gas storage was implemented in 2022. It stipulates that underground gas storage facilities in Member States must be filled to at least 80% of their capacity before winter 2022/2023, and then to 90% before subsequent winters. At the global level, the European Union aims for a collective filling rate of 85% of the total capacity of underground gas storage in 2022. For Member States without storage facilities on their territory, the regulation requires them to store 15% of their annual gas consumption in facilities located in other Member States. All these elements led to gas storage levels at the end of 2023 being higher than the average of the past five years.
As a result, gas prices dropped significantly, stabilizing around €40/MWh on average over the course of 2023.
The drop in gas prices also played a major role in reducing electricity prices in wholesale markets in France. Even though electricity production from fossil fuels remained low, electricity prices in France are still very sensitive to changes in gas prices, partly due to France’s central position in the interconnected European system and the price-setting mechanism on the markets.
The year 2023 was marked by record production for both wind power, with 50.7 TWh, and solar power, with 21.5 TWh. These energy sources accounted nearly 15% of total electricity production, contributing to supply security and the increase in low-carbon electricity supply in France and neighboring countries through exchanges. The installed capacity of solar farms and offshore wind turbines saw strong growth in 2023. Hydroelectric production, which reached 58.8 TWh, maintained its position as the second-largest source of electricity in France. This recovery compared to 2022 is largely due to increased rainfall, which helped maintain high storage levels. The increase in installed capacity and the good load factor resulting from favorable weather conditions also contributed to this improvement in renewable energy production.
According to the energy mix scenarios developed by RTE for 2035, installed capacities vary depending on the projections. For solar power, installed capacity in 2023 is 17.2 GW and is expected to reach between 55 GW and 90 GW, depending on the scenario, which represents a three- to five-fold increase in 2023 production. For wind power, both onshore and offshore, installed capacity in 2023 is 22 GW and is expected to reach between 30 GW and 39 GW by 2035, an increase of between 36% and 77%. Finally, for hydropower, forecasts range between 27 GW and 28 GW, representing an increase of around 5%.
Can prices fall to levels lower than those before the crisis?
The question is difficult and depends on nuclear availability in France. Although nuclear production has rebounded since its low point in 2022, it has not returned to pre-crisis levels, yet. In 2023, production reached 320.4 TWh, an increase of 41.5 TWh compared to 2022. However, this figure remains below the average of 394.7 TWh recorded between 2014 and 2019. Moreover, several uncertainties lie ahead regarding nuclear availability in the coming years. Indeed, France's nuclear fleet is aging, and the question of extending its lifespan beyond the next decade remains open.
Several factors could lead to an increase in nuclear production and availability: the launch of the Flamanville EPR, the completion of the Grand Carénage program, increased operational efficiency, and shorter maintenance times. If all these factors come together, electricity prices are likely to fall below their pre-crisis levels. In fact, nuclear production equivalent to 400 TWh, combined with increased renewable energy production, would exceed the current subdued demand for electricity.
Let’s consider a scenario: Improved nuclear availability; what will happen?
Let’s imagine a scenario where the availability of nuclear power plants in France improves significantly. Thanks to successful and quicker maintenance operations, as well as favorable weather conditions (with no plant shutdowns due to heatwaves), the nuclear fleet reaches its full potential. In this scenario, we won’t consider future SMRs or new EPR reactors, but instead, return to nuclear production levels comparable to pre-crisis, around 400 TWh.
Using 2023 figures for electricity consumption and production in France, this level of production would generate a surplus of 118.6 TWh. This means that France would become a significant electricity exporter, as its domestic energy needs would be fully met.
However, this situation could create a dilemma. If neighboring countries do not need large quantities of imported electricity because they are already covering their own needs, this surplus production in France could lead to a drop in electricity prices. As a result, EDF, the main electricity producer in France, might not find it beneficial to further improve its efficiency, as an oversupply would drive down market revenues.
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