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 address 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?
Drop in Electricity and Gas Demand Following the Energy Crisis.
In 2023, electricity consumption in France was 445.4 TWh, down from 452.8 TWh in 2022 and 471.5 TWh in 2021. Gas consumption also decreased, from 430 TWh in 2022 to 381 TWh in 2023. Several factors explain this drop in electricity and gas demand.
Firstly, 2023 was one of the warmest years since the early 20th century, reducing the need for heating in households. Secondly, nuclear power plant availability returned to pre-2019 levels, which, combined with strong renewable energy production and consumer energy-saving efforts, led to a significant reduction in gas-fired power plant usage, with a 41.3% decrease compared to the 2018-2019 reference period.
Additionally, this demand reduction is the result of voluntary energy-saving efforts, such as lowering heating temperatures, turning off unnecessary lights, unplugging devices on standby, and using more energy-efficient cooking methods. These efforts are expected to continue in the short term. The general increase in prices also encouraged both individuals and businesses to consume less. Some industrial players have switched from gas to other energy sources, such as electricity. Notably, 27% of the structural decrease in consumption comes from large industrial companies, even though they account for only 14% of consumers.
Increase in LNG Export Capacity and High Storage Levels.
Since the energy crisis, the tension between gas supply and demand in Europe has eased due to two main factors. On the supply side, Europe has diversified its sources, increasing imports of liquefied natural gas (LNG), notably through the construction of new, even temporary, regasification terminals. On the demand side, consumption has decreased, primarily due to high prices.
The European Union currently operates 37 LNG import terminals. Of these, eight were commissioned and four were expanded in 2022 and 2023. Thirteen new projects are currently under construction, with expansion work planned for four existing terminals. The EU has already added 36.5 billion cubic meters of new LNG capacity and plans to build an additional 94 billion cubic meters by 2030. Once these projects are completed, Europe's total LNG capacity will reach 405 billion cubic meters.
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.
Increase of the renewable production
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.
Is a second energy crisis possible?
Spoiler Alert: we cannot answer this question with a yes or no. Indeed, there are numerous 'swords of Damocles' hanging over us. If any of the following scenarios were to occur, prices could rise sharply once again.
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Rapid increase in global natural gas consumption
Few factors could lead to a significant increase in gas consumption. However, a rapid recovery in China's gas consumption, due to a rebound in industrial production and a reduced reliance on coal, could create ripples in the LNG market. This Chinese demand, if it were to materialize, has proven to be very price-elastic, so its impact would be limited.
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Rapid increase in global electricity consumption
If global electricity demand increases more rapidly than supply, it would result in a rise in prices. Why would global consumption increase rapidly? Firstly, data centers are highly energy-intensive and continue to grow. The electricity consumption of data centers worldwide was estimated at 450 TWh in 2022, accounting for about 1.7% of global final electricity demand. The electricity consumption of digital data centers is expected to double by 2026, reaching 1,000 TWh, mainly due to the growth of artificial intelligence and cryptocurrencies. To give a sense of the scale of this consumption, it is equivalent to Japan's electricity consumption. Artificial intelligence has seen rapid growth in recent years, becoming an increasingly common aspect of our daily lives. Among the software that uses AI, you are likely familiar with ChatGPT, Gemini, Alexa, and others.
Another hypothesis is a rapid reindustrialization of European countries. This models investment in cutting-edge and strategic technology sectors, as well as the consideration of relocating high-emission production back to reduce the carbon footprint of French consumption. The effect on energy consumption would be an increase in direct electricity consumption by the industry of nearly 60 TWh/year, along with an increase in the consumption of low-carbon fuels such as hydrogen compared to the reference trajectory (+37 TWh/year). According to the RTE “reindustrialization” scenario, these trends lead to a total consumption in France of around 752 TWh by 2050, representing a 58% increase compared to 2019.
Another possibility is the electrification of uses, particularly in the transport sector, which is currently one of the least electrified. In this scenario, the share of electric trucks would rise from 0% to 76%, and the number of electric cars would increase from 1.2 million to 37.2 million. This scenario also implies a shift to electric heating in the residential and tertiary sectors, as well as a transition to electric processes in industry. Consequently, electricity consumption in France could increase to as much as 700 TWh by 2050.
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Geopolitical risk
Another hypothesis is the geopolitical risk, particularly related to Russia or the Middle East. Indeed, throughout 2024, attacks on Ukrainian energy infrastructure could continue and extend to European infrastructure in the coming years. In the Middle East region, various tensions could lead to the closure of the Panama Canal, forcing oil tankers and LNG carriers to take a longer route to Europe, resulting in price increases.
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Climate hazard
Finally, another possibility that could lead to an increase in prices is climate change. Indeed, the multiplication of extreme weather events (storms, droughts, floods) will negatively impact the production of various energy sources and affect energy infrastructure.
Water is an essential element for energy production. Droughts are likely to significantly affect river levels, decreasing hydropower production and rendering certain thermal production capacities (nuclear, coal, and gas) unavailable, as they cannot cool down without significantly raising the temperature of the rivers themselves. During wind gusts exceeding 90 km/h, wind turbines will shut down for safety reasons and therefore will not produce electricity. Finally, severe heatwaves will alter consumer behavior. In 2021, the number of air conditioners installed worldwide reached 1.5 billion. This number is expected to triple by 2050, according to the International Energy Agency (IEA).
SOURCES
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RTE - Bilan électrique 2023 : https://assets.rte-france.com/prod/public/2024-02/Bilan-electrique-2023-synthese.pdf
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RTE - Bilan prévisionnel 2023-2035 :
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IEEFA - Europeean LNG tracker :
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IEA - Electricity 2024 - Analysis and forecast to 2026 :