European Gas and Power Markets – Hot Topics for 2025
As we close out 2024, my mind has turned to the hot topics to watch out for in 2025 in gas and power markets (my personal thoughts rather than an official AFRY position). I’m sure I'm not comprehensive and I welcome others views:
I have left out all the myriad detailed changes happening in various countries and markets in 2025, as there is so much going on; capacity mechanisms, market coupling, locational markets, CBAM impact, and so on. Please do contact the AFRY country experts for the full details.
Trump card
The impact of Donald Trump’s presidency may take some time to filter through to European markets, so we will not see large impacts in 2025.
The expected reduction in GDP from economic protectionism will likely impact from 2026 onwards. And we may find more pressure on European manufacturing from redirected Chinese exports. Expect issues especially for the European car industry with lower exports to the USA and more pressure from Chinese car imports.
And while losing an ally in the fight against climate change is important, changes in the US on decarbonisation trajectory may be less dramatic than promised.
The IRA will not be dismantled as too many Republican states benefit, although we may see more blue hydrogen coming through. The cleantech race will continue as before and this is an area for Europe to really get moving, if it wants to meet its plan to scale-up net-zero technology manufacturing in the EU to provide more than 40% of annual EU needs by 2030.
The ghost of gas crisis past
European gas prices for 2025 have been ticking up of late. A cold snap and an announcement from Norway about some smoke have been enough to spook the market.
2025 will be a crunch year though, in terms of Europe’s weaning of itself off Russian gas. What could possibly go wrong when we’ve got great storage levels and US LNG exports supported by “drill baby, drill”.
Well, 2024 is a La Nina year – although a weak one. We’ve got some cold weather at the start of winter 2024 and storage is lower than this time last year. Europe really did get lucky with the weather over the last two winters.
We will have less pipe gas from Russia as contracts end in 2024. We have declines in domestic production in the UK.
The concern is what happens if we see a combination of cold winters in Europe and hot summers in Asia and pressure on LNG prices during the storage filling season.
One could therefore expect higher gas prices in 2025 than in 2024 with a risk that if we see either of a supply interruption, or a delay of new LNG coming on in the USA in the second half of 2025, then we may see some more extreme prices. And the usual price shape with lower gas prices in summer, once more affected.
Therefore, the future impacts on inflation and cost of living need to be factored in for those with customer facing business.
Hydrogen Realism
On hydrogen, the hubris of the early 2020s gives way to a more practical and realistic approach in 2025.
Projects are being developed and moving ahead in the areas in which hydrogen can really play a role. The understanding of the impacts of big plans for green hydrogen on renewables build out has become clearer for policy makers.
Nonetheless support mechanisms need to be refined in this area (and in others) to better support new clean technology development.
Auctions can be great in situations where one has real competition and stability in costs (or short lead times) but in hydrogen and in, e.g. floating offshore, one can question whether auctions are the best option.
We could therefore expect further refinement of support for new clean tech in 2025.
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Data centre demands
A big topic of discussion in 2024 has been the impact of data centres and AI on electricity markets. This will only grow in 2025 as we see increasing demand for electricity from data centres, plus increasing demand for grid and connections too.
One aspect of this increasing demand is the growing use, and one might argue, misuse of generative AI. Anecdotal stories of people using ChatGPT to do calculator-level calculations and of people generating multiple images without realising the energy and environmental impact of their actions.
How to make the connection between the AI user and their impact is a problem that has to be solved, for the planet’s sake. As a result, one might expect that current predictions for massive demand growth may be over-blown.
There’s no transmission without transition
Yes, normally it’s the other way round but something must change in the grid business in Europe to enable the necessary grid buildout. In addition, the existing grid is old, 40% over 40 years, and needs replacing and upgrading.
Targets for clean energy need to be coupled with targets for grid build. We need more interconnection between countries, and to resolve constraint management by creating appropriate zones where needed and with better use of digital technologies.
Planning is still an issue, and politicians need to be straight with their voters about what has to be done.
Finally, we may see supply chain constraints as a looming issue for grid in 2025, because equipment is specialised, production is constrained, and we don’t have enough suitably qualified individuals.
Where will energy companies, utilities and investors find profitable growth?
Batteries.
No just kidding.
OK, some selected batteries that have a good case, but investors need to do their homework much better when it comes to battery investments. Reinforcing local grids at high power charger locations is in vogue at the moment. Reducing larger transmission grid constraints also. The question is for how long will the business case last? Watch out for competition on ancillary service provision. And developments on 24/7 matching which may ride to the rescue at some point. In some geographies more support for batteries (by way of e.g. a capacity mechanism) will be required, to enable more renewable generation to get on the grid.
At the other end of the spectrum, LNG Regas utilization in the UK may drop in 2025, as less gas is wheeled through the UK to the continent as more continental LNG regas comes online. The debate about how good or bad LNG is for the environment will continue, not least following the US DoE report on LNG exports. The emissions associated with LNG gasification and regasification must be properly accounted for in future.
Biomethane will come back in focus with higher gas prices.
CCUS is starting to get serious in 2025 and will get a boost under Trump in the USA, so, we may finally get CCUS really going after so many false starts. Look cross-sector to heavy industry and refineries and for opportunities with blue hydrogen. People often focus on capture, but transport and storage may provide the clearer opportunities.
Offshore wind has had a bumpy ride recently and one might argue that with big oil pulling back, more space is available for others. But then we also see an auction with no bids at the end of 2024. Another bad development in our fight against climate change. Again, comes down to bad market design. Having stabilisation mechanisms via CfDs is no bad thing as we saw during the Ukraine crisis, giving a lot of protection for customer bills.
We can expect greater levels of price volatility particularly in short-term electricity prices. Those who can manage that increasing price volatility should do well from trading opportunities. Complexity of markets is increasing for the time being, investing in the best models, data and algorithms makes sense. ??
The big perennial question: will next year be THE YEAR, in which we really unlock customer value? Given progress in Europe on smart meters, hourly settlement and EV uptake, not quite yet. That doesn’t mean of course that there won’t be some profitable behind-the-meter opportunities available. But the pace of change here is not good enough. We must increase focus on unlocking flexible demand as soon as possible, or else we will end up building too many batteries, which have an environmental cost in themselves.
Of course, profitable opportunities can also be found in exiting the right businesses in 2025. It may be a good time to think about selling those gas/filling stations, before their future becomes questionable. Or exiting gas grids. But then I think back to the old coal-fired power stations, sold only for the value of the coal on site, that ran much longer than expected and made their owners good money. As long as you can square it with your conscience.
Wishing you all a Merry Christmas and a green and profitable New Year!
PS the pic is Control Room B, a cool bar at the redeveloped Battersea Power Station on the Thames near our London office
Director at Lake Street Consulting Ltd
1 个月An interesting article. I would expect nothing less! Smiling that finally you mention weather as a possible driver. And like the math fact. 2025 is also the sum of cubes of all the single digits from 1 to 9 (1^3+2^3...+9^3)=2025
Hydrogen | Green Ammonia | E-Fuels | Decarbonisation | Energy Transition
1 个月I completely agree with you that a new hydrogen ‘realism’ has emerged and will continue into 2025. However, I see this as a positive shift as the hydrogen hype of the past few years has been a distraction and has, to some extent, caused some damage to the important role that hydrogen play in specific sectors. Policy measures should focus on those areas where there is no option but to continue to use (green) molecules such as hydrogen and biimethane.
Environment, Economics, Energy, Climate Change, Policy
2 个月Great perspective, though strategically it may be wise to hedge against slow growth of the decarbonisation. Happy holidays
Labour Women's Network Graduate, Labour Muslim Network, Kirklees LA School Governor, Kirklees Climate Commissioner, Affiliate Huddersfield Business School, UN Women UK, Unite the Union.
2 个月Great perspective
Partner at PwC Middle East
2 个月Excellent mathematical fact Matt!