Quarterly market reports confirm globalised nature of gas market in 1st quarter of 2021

The surge in demand for gas in Asia in January had a marked impact on trade in LNG and prompted a spike in European wholesale spot gas prices in the first quarter of 2021, according to the latest Commission quarterly reports on gas and electricity markets published today. This impact serves as an illustration of the globalised nature of natural gas markets, the report concludes, and reminded Europe that Asian markets can swiftly and significantly influence European hub prices, a phenomenon last seen in 2018. Meanwhile, on the electricity market, figures show that electricity consumption recovered close to pre-pandemic levels, despite a wide range of restrictions remaining on economic and social activity.

The gas market report notes that wholesale spot gas prices in Europe were significantly impacted by the high price premium of East Asian gas markets in January 2021, resulting in a redirection of LNG cargoes towards Asia and reducing gas supply in Europe. In turn, this prompted a price spike on the TTF and other hubs. Although these European prices eased back in February, they picked up again in March, along with other energy commodities and carbon prices. Forward contracts were less volatile, implying a possible correction in spot prices in the future. Retail gas prices for industry were still down relative to the first quarter of 2020, however, the rise in wholesale market prices is already perceptible in household retail prices in many EU countries.

Gas storage levels in the EU fell to 30% by the end of March 2021, which was 24% lower than at the end of March 2020, implying higher refilling needs in the following two quarters. In turn, this additional demand has had an upward impact on wholesale gas prices during the spring months of 2021. Over the last few months, the key factors impacting wholesale gas prices were the evolution of storage fullness rates and LNG availability, primarily influenced by the Asian market price premium over Europe.

EU gas consumption in the first quarter of 2021 rose by 10 billion cubic metres (bcm) – or 7.6% – in year-on-year comparison, amounting to 132 bcm. Electricity generation from gas also rose year-on-year by 3.4% (4.9 TWh). At the same time, EU net gas imports fell from 81 bcm last year to 78.5 bcm in Q1 2021 – a 3% drop. Russia remained the leading supplier, followed by Norway and LNG import sources. Pipeline gas imports from Algeria more than doubled year-on-year in Q1 2021, owing to the competitive oil-indexed contracts amid rising hub gas prices. The recently inaugurated Trans Adriatic Pipeline (TAP) ensured 1.2% of the total extra-EU gas imports. EU LNG imports (17 bcm) fell by 29% year-on-year. Gas traded volumes on the European hubs fell by 13% in Q1 2021, and TTF remained the most liquid hub in Europe, pooling around three quarters of all European gas trade. Hydrogen cost-based assessments showed an increase over the last few months, in parallel with higher gas and electricity prices.

The electricity market report highlights how EU-wide consumption increased 2% year-on-year, as increasing heating demand and recovering manufacturing industry were able to reverse falls in other sectors of the economy – to the extent that consumption was close to pre-pandemic levels.

The long and cold winter of 2020/2021, fostered a recovery in electricity demand and made more space for fossil fuels in the electricity mix, in spite of increasing carbon prices. Despite lower winds across Europe, the share of renewables still managed to reach 38%, beating fossil fuels (35%) as in last quarter of 2020. The presence of renewables in the mix was supported by an increase of 11% in hydro generation (+11 TWh), 7% of biomass (+2 TWh) and solar (+1 TWh) on yearly basis. Low levels of electricity demand during the start of the COVID crisis (Q1 2020) amplified the comparative increase in fossil fuel generation during this quarter. Coal and lignite generation rose by 14%, while nuclear output remained practically unchanged. Gas profited from the increased demand only marginally, seeing its output grow by 3% (+5 TWh) as higher gas prices partially reversed coal-to-gas switching in some markets.

Prices of emission allowances increased significantly in the first quarter – and have continued rising, moving above 50 €/tCO2 in May, double the figure last November – putting coal and lignite power plants at a greater disadvantage against their less polluting gas-fired competitors. High carbon prices also raise wholesale electricity prices, as costs are passed into retail prices with some delay. In the medium-term, high carbon prices send a powerful signal boosting investments in renewable capacity as it is already cheaper in most Member States to build a renewable generation source rather than keep a state-of-the-art coal/gas power plant.

Most electricity markets in the region saw wholesale prices returning to pre-pandemic levels during the first Quarter, as practically every European country experienced a surge in prices and multi-year records in January (with the exception of South Eastern Europe). The European Power Benchmark averaged 53 €/MWh in Q1 2021 – a remarkable 79% higher than in the same quarter last year. The rising trend continued in the following months on the back of extremely high fuel prices. In June, electricity prices in many markets, including France and Germany, reached 13-year highs.

Demand for electrically chargeable vehicles (ECVs) rose over the first quarter. More than 350,000 new ECVs were registered in the EU from January to March 2021. This was the second-highest quarterly figure on record and translated into an impressive 14% market share, more than one and a half times higher than in China and four times higher than in the United States.