European energy prices are surging, creating ‘frightening’

LONDON — Europe is facing continued volatility in its wholesale gas markets, prompting concerns across the region that an energy crisis could be about to get even worse.

The front-month gas price at the Dutch TTF hub, a European benchmark for natural gas trading, was around 5% higher by 1 p.m. London time on Wednesday, with the price reaching 93.3 euros per megawatt-hour. Contracts for March and April delivery were also up by 5% on Wednesday, according to New York’s Intercontinental Exchange.

Meanwhile, the European day-ahead price increased to 94 euros per megawatt-hour, according to data from Reuters. While a far cry from the peak of around 182.3 euros seen in December, Wednesday’s activity still marked a significant price rise from the end of 2021, when prices dipped below 70 euros per megawatt-hour.

Wednesday also saw German day-ahead baseload power prices gain more than 50%, while their French equivalents increased 17% during early trade, according to Reuters.

It comes after European benchmark gas prices surged 30% on Tuesday, amid concerns about a cold winter, low gas inventories and Russia constricting supply to Europe.

Over the course of 2021, European wholesale gas prices rose by more than 400%, setting new records.

Ole Hansen, head of commodity strategy at Saxo Bank, told CNBC in an email that gas prices in the EU and the U.K. remained at the mercy of the weather, the pace of shipments, and Russia.

“Into January, the price of gas has resumed its ascent, again with the prospect of colder weather driving increased demand for heating and very, very low supplies from Russia, especially via two important pipelines through Poland and Ukraine,” Hansen added. “Whether Russia is deliberately keeping supplies down due to Nord Stream 2 pipeline approval delays and the Ukraine border crisis is difficult to say. But it highlights failed energy and storage policies in Europe and the U.K., which has left the region very dependent on imports of gas, especially given the still unreliable level of power generation from renewable sources.”

Front-month natural gas contracts in the U.K. were up almost 6% on Wednesday, with contracts for April delivery gaining more than 7%.

Meanwhile, day-ahead prices at the National Balancing Point, the U.K.’s benchmark for natural gas trading, rose more than 10% to around £2.25 per therm.   

The U.K. is particularly reliant on natural gas as an energy source, with more than 22 million households connected to the country’s gas grid. Britain’s largest single source of gas is the U.K. Continental Shelf, which made up around 48% of total supply in 2020. However, the UCS is a mature source, meaning it has to be supplemented with gas imported from international markets.

The U.K. has limits on how much suppliers are able to charge consumers for energy, with price caps reviewed by the government…