US gas loses European market as Europe relies more on solar power
Jul 17, 2023
For decades, natural gas has been the main source of electricity in Europe, which has meant that gas prices have largely determined utilities' pricing. However, following the outbreak of the Russian-Ukrainian conflict, European power companies have accelerated their development of renewable energy sources, particularly solar, while reducing fossil fuel generation. In fact, in June, European power companies generated a record 10.4 per cent of their total electricity from solar, more than double the share of solar in Europe's energy mix since 2018. This is an important milestone in Europe's energy transition process.
However, the surplus of solar power generation in Europe is depressing wholesale electricity prices and leading to lower revenues and profits for utilities, a phenomenon also known as the renewable energy erosion effect, as Europe's power systems prioritise cleaner electricity supply. Another factor contributing to lower utility profits is capture rates. Capture rates and electricity prices are the main factors that determine the profitability of electricity sales for an electric utility over a given period of time. Typically, natural gas-fired power plants have capture rates close to 100 per cent, while renewable energy capture rates tend to be less than 100 per cent. Solar energy has even lower capture rates due to its highly intermittent nature.
Lower gas demand in Europe
Europe's increasing reliance on solar power means its demand for US natural gas and LNG is lower.
Although China's LNG imports hit a five-month record in June, weak demand for natural gas, particularly in Europe, dampened price increases. Last month, China imported 5.96 million metric tonnes of LNG, 4.64 million metric tonnes more than a year earlier and 5.54 million metric tonnes more than in May. However, these increments still proved insufficient as the spot price of natural gas fell to $9/mmBtu, down 87 per cent from the record high of $70.50 reached in late August and the lowest since April 2021, the company said.
The European Union wants to fill its gas stocks before winter, but the long-awaited buying spree has yet to arrive. Europe imported 9.5 million metric tonnes of gas in June, compared to 12.11 million metric tonnes in May, a drop in imports and the lowest monthly record since August 2022. Suffering from one of the more severe energy crises on record, Europe created a cartel of gas buyers' organisations in 2022 and began issuing supply tenders. Around 50 gas suppliers and large industrial gas consumers in the EU immediately expressed interest and were willing to take part in the EU's joint gas-buying initiative, said Sefcovic, vice-president of the European Commission. One of the key objectives of the whole initiative is to keep the price of gas low by buying it in large quantities.
Europe's gas buyers' organisation has been a great success, with European gas reserves reaching 80%. However, Europe's purchases of US LNG are still declining, with its June purchases of 4.15 million metric tonnes down from 5.63 million metric tonnes in May.
Meanwhile, U.S. natural gas inventories have been rising.
The massive hoarding of natural gas in the U.S. has put significant pressure on futures prices in the near term. For natural gas futures for delivery in 2023, they are currently trading nearly €12/MWh below the April 2024 price. By contrast, units of natural gas were trading at €5 higher at the start of this year and a full €38 higher at the same time last year.
