Spot and short-term contracts:

In August, Spain registered the most expensive month in the history of electricity prices. The average price of electricity on the wholesale market in August was 308,3 €/MWh, 19,3% more than in July, when it reached 258,1 €/MWh, and the most expensive month since March, when we first broke this record in 2022, according to data from the Iberian Electricity Market Operator (OMIE).

It beat all the figures seen until now, reaching up to eight daily records. But it has been from 23^rd August onwards that prices have been on a downward trend, reaching an average value of 416,5 €/MWh in the last week of August, three times the figure set a year earlier.

The reason for this increase lies in the extremely high values of the gas compensation scheme (the amount gas-fired power plants operators have to be compensated with for the high cost of gas they have incurred into). This gas compensation depends on two factors: the spot price of gas and the volume of gas-fired power production. The first one has fluctuated this month between 120 and 250 €/MWh, up to 5 times the usual price, whereas the gas cap for producers’ offers is 40 €/MWh. This means that the average compensation for each MWh used has averaged 154,4 €. The second factor has not helped either. The volume of gas-fired power thermal production has also been abnormally high given the low levels of hydro production – due to the drought experienced throughout Europe – and a weak wind production.

Daily electricity demand averaged 712,2 GWh in August, approximately the same value as in June, but 6% lower if compared to July due to the high temperatures recorded during this month.

On the generation side, as previously mentioned, CCGTs have again increased their share of generation, rising from 28% of the mix as per our last report (June) to 32% this August, and followed by nuclear (21%). This increase in CCGTs generation is caused by a decrease of both wind and hydro output. Wind generation saw its share drop from 30% in June to 16% in August.

However, the share of renewable versus non-renewable energy generation continued to be 40% – 60% as coal and cogeneration have practically disappeared of the mix this month.

Regarding gas prices (MIBGAS), a strong upward trend was observed during the second half of August, reaching historical records of more than 200 €/MWh for 6 days in a row. This rise has been even stronger in European countries where there is a greater dependence on Russian gas, and mainly due to Gazprom’s announcement that it would stop pumping gas to Germany from 31 August for three days for maintenance reasons. TTF prices have exceeded 300 €/MWh. In this context, Spain imported gas through the VIP Pyrenees gas pipeline – the gas interconnection with France – every day of August despite the fact that it has been exporting gas to the rest of its European partners since the start of the war. According to the August operating plan published by Enagás, Spain has imported almost 3,000 GWh of gas via VIP Pirineos Done with one objective in mind: to increase gas storage for the winter, Spain has been allowed to do so because Europe has already fulfilled its obligations to have its gas storage facilities 80% full, the objective being to have them full by 1 November.

The Minister Teresa Ribera has met with Iberdrola and with representatives of the Spanish Gas Association (Sedigas) and the Spanish Electricity Association (Aelec) to gather proposals that will help Spain reduce its gas consumption with the aim of designing the Contingency Plan that the Government must send to Brussels.

Along with gas, CO2 prices rose sharply, and each recorded a new all-time high this month. This led to a price increase of around 30% in most European electricity markets. The closing price (EUA spot) reached on Friday 19^th  of 98.01 €/Tn is the highest ever recorded, surpassing the highest prices reached just before the start of the war in Ukraine.

In the news, if this price scenario is scary in Spain, it is even worse in the rest of Europe. Both Germany and France have reached daily electricity prices of 700 €/MWh in the last week of August. Faced with this crisis, the President of the European Commission, Ursula von der Leyen, announced on August 29^th that the European Union is preparing some emergency measures to curb the soaring electricity prices. And an extraordinary meeting of the Energy Council has been convened in Brussels, with the participation of EU Energy Ministers, for September 9^th.

Medium- and long-term contracts:

Moreover, forecasts for the future are not encouraging either: The high prices seen for gas, CO2 and, thus, electricity are not likely to change immediately. The market is forecasting a very harsh winter in Europe, especially in the main markets of France and Germany.

Concerning Spain, gas futures (MIBGas Cal23) absorbed what was seen in the spot market, with the contract exceeding 200 €/MWh on 19 August and remaining above this value throughout the rest of August. However, despite this high price, our country will not run out of gas, as there are enough LNG contracts with the regasification plants to ensure our supply throughout the winter. Spain has met the target set by Brussels three months in advance. This requirement of the EC has obliged Member States to fill their underground storage facilities to at least 80% of their capacity by 31 October. This target has already been achieved by Poland, Sweden, Denmark, Belgium, the Czech Republic, Portugal and France. Our reserves have already reached 81% of their capacity. Still, Spain needs to continue filling its storage facilities as much as possible for the winter in case it is necessary to help other European partners during the colder months.

On the other hand, this storage figure will not be sufficient to cover demand, so further savings will have to be made. In the case of Germany, households consuming gas will be charged a levy; for its part, the UK is preparing for possible supply cuts and for the price to double.

As far as CO2 futures on the EEX market are concerned, the benchmark December 2022 contract exceeded an average price of 90 €/Tn this month.

The Spanish electricity forward market absorbs the panic shown by the spot market and the fear of gas shortages for the coming winter. The average price in August for the next Q4-2022 was 193 €/MWh, reaching a peak value of 265 €/MWh on August 26^th. The OMIP Cal2023 reached values of c. 350 €/MWh during the last week of the month and dropped on August 31^st to close the month at a value of 258,5 €/MWh. The gas compensation price, in force until May 2023, should then be added to these values.

During August, on the one hand, front-month Brent crude oil futures recorded an average closing price of above 97 $/bbl. This represents a decrease of 7% when compared to the previous month’s average price. The low of the month was reached on Tuesday 16^th, when the closing price was 92.34 $/bbl. On the other hand, the average price for 2023 during August has remained the same as in July (around 90 $/bbl) but has decreased with regards to the upward trend seen in June (around 100 $/bbl).

This drop in Brent prices is strongly associated with fears of a possible economic recession, particularly in China and the United States, following the communication by the International Monetary Fund warning that the world economy faces increasingly uncertain circumstances as the three major world economies (China, the United States and Europe) show signs of stagnation amid the consequences of the war in Ukraine.