European Power Prices Climb to Year High on Sanctions Threat

(Bloomberg) -- Power prices across Europe surged with rising natural gas and coal markets as the European Union prepared further energy sanctions against Russia.

German next-year electricity, a benchmark for European power rates, rose to the highest level this year, while French, U.K. and Nordic prices climbed. As the EU plans to ban Russian oil over the next six months, traders are also watching Russia's celebration next week of its World War II victory for more clues on how the war with Ukraine will develop.

“Power forward prices extended hefty gains along the curve, driven up by a steep rise of gas and coal prices as the European Union is heading toward a Russian oil ban while the energy markets are nervously waiting for the next step and possibly military escalation that might follow the May 9th celebration,” Engie Energy Scan analysts wrote in a note.

The EU is still debating whether to impose a full ban on Russian crude oil imports that could knock another 10% off the nation's output. For its part, Russia has already shown its willingness to cut gas exports after shutting off supplies to Poland and Bulgaria over their refusal to comply with the Kremlin's demand for payments in rubles. Such restrictions could spread to more nations as gas payments come due at the end of the month.

READ: Russia Seeks to Annex Occupied Ukraine as Invasion Goals Shift

German futures for next year added as much as 6.2% to 228.75 euros ($242.28) per megawatt-hour, the highest level for a year-ahead contract since Dec. 27 and a record for the underlying 2023 contract. Daily power prices have so far averaged at 181.49 euros this year on the Epex Spot exchange, with market now expecting levels to rise even higher in 2023.

The hike was supported by gains in European coal for next year, which climbed to a two-month intraday high of $252 per ton, and benchmark Dutch front-month gas futures adding as much as 3.2% to 107.13 euros per megawatt-hour.

“The market has most likely been pricing in an increased risk of war, inflation and gas flow interruptions to the EU long term,” said Rystad Energy AS analyst Fabian Ronningen. “This high price level over such a long period is devastating to European households and businesses and damaging to the overall economy.”