The past year has been a tumultuous one for European energy markets. After experiencing extreme volatility and all-time highs little more than a year ago, 1 power prices across the continent rose to a nearly unfathomable level last fall. Wholesale prices of both electricity and natural gas nearly quadrupled from previous records in the third quarter of 2022 compared with 2021, creating concerns for skyrocketing energy costs for consumers and businesses (Exhibit 1). Prices have since fallen unexpectedly, thanks in part to warm winter weather. Such volatility highlights the structural challenges Europe faces as it seeks to transition its energy system away from carbon-emitting fossil fuels. At a time when these decarbonization efforts are boosting electricity demand across Europe, the
market is reeling from unprecedented supply constraints. The war in Ukraine, disruptions to nuclear facilities in France, and low output from hydroelectric plants have combined to significantly reduce the continent’s dispatchable power—electricity that can be easily switched on and off. Primarily driven by drought, hydro output was down by 19 percent between January and September 2022 across Europe, compared with the same period in 2021. 2 In France, where 32 of the country’s 56 reactors were down for maintenance in September, nuclear energy output has declined by 14 percent over the same period (Exhibit 2). 3 Even more destabilizing is the dwindling supply of Russian gas. Prior to the invasion of Ukraine, Russia supplied 30 percent of Europe’s natural gas, a resource that exerts a large influence on electricity prices and is a mainstay of the continent’s power
Exhibit 1 Wholesale power prices in the European Union have surged.
European gas (TTF, THE, PEG), 1 € per MWh
European power (EPEX FR, GR, NL), 2 € per MWh
Germany (THE) France (PEG)
Netherlands (TTF) 2016–21 average
Germany
Netherlands
France
2016–21 average
250
1,500
200
1,000
150
100
500
~3x
50
~3x
0
0
2016
2018 2020
2022 2024
2026
2028
2016
2018
2020
2022 2024 2026
2028
Note: Historical data: daily wholesale average prices computed into a monthly basis. Forecast data as of September 16, 2022. Monthly data until June 2023, quarterly data until Q1 2024, and yearly data until 2027–28. 1 Title Transfer Facility, Trading Hub Europe, and PEG (monthly price produced by EEX). 2 European Power Exchange: France, Germany, and the Netherlands. Source: Bloomberg; European Energy Exchange (EEX); Nasdaq; PEGAS; McKinsey analysis
McKinsey & Company
1 Eivind Samseth, Fabian Stockhausen, Xavier Veillard, and Alexander Weiss, “Five trends reshaping European power markets,” McKinsey, October 19, 2021. 2 McKinsey analysis based on data from Ember, ENTSO-E, Fraunhofer, the International Renewable Energy Agency (IRENA), and National Grid. 3 McKinsey analysis based on data from ENTSO-E, Fraunhofer, and National Grid; “France to restart all nuclear reactors by winter amid energy crunch,” France 24, September 2, 2022.
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