Energy prices: volatility of German power smacks of market dislocation
Germany may be exacerbating the crisis it seeks to quell
What is wrong with the European energy market? The simple reply is that Russia is using it for political blackmail. But everyone has known this for months. It does not satisfactorily explain why a key German energy future, the “front year” power baseload contract for 2023, rose last Friday. It leapt 25 per cent to close at almost €1, 000 per megawatt hour.
Volatility in this and other contracts is rattling energy suppliers and purchasers. The price movements feed into steep inflation forecasts for next year, worsening western Europe’s apocalyptic mood.
The European Energy Exchange was alarmed enough to call an extraordinary meeting of its member council this week. This rejected a halt to trading, while calling for EU states to bolster the strained finances of energy buyers. That stress was reflected in a plea from German utility Uniper for another €4bn bailout to keep the lights on.
Wild volatility is sometimes a characteristic of a malfunctioning market. That was the diagnosis when nickel surged in London earlier this year. That did not reflect fundamentals but one big, overextended short seller.
Liquidity, or the lack of it, is playing a part in recent energy price swings, which predate Russia’s full-scale invasion of Ukraine. Prices rose in August 2021, triggering bankruptcies at UK energy suppliers.
Other participants have quit European energy markets, deterred by volatility and soaring collateral requirements. Traded power volumes are down 40 per cent in Europe in the first six months, says broker Marex.
Disruptions at French nuclear and hydro generators are adding to the pressure that shortages of Russian gas are putting on energy markets. Enough substitute gas has been found in the short term. In that respect, energy markets cannot be described as broken.
They may be badly skewed, though. One theory blames Germany’s “whatever it takes” philosophy of support for power companies in their rush to secure winter supplies. That encourages sellers to sit on their hands, waiting to see how high prices can spiral. Germany may thus be exacerbating the crisis it seeks to quell.