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The Energy Transition And What It Means For European Power Prices And Producers: September 2021 Update

S&P Global Ratings has raised its base-case assumptions for power prices by up to 10% in five of Europe's main markets over 2021-2023 from its January 2021 assumptions (see table 1). The reasons for the change are more supportive commodity prices and accelerated anticipated closures of conventional generation plants (notably nuclear and coal) in the next three years as part of the stringent decarbonization energy policies across Europe. At the same time, the pace of commissioning of new renewables projects and interconnections will not be sufficient to offset the loss of conventional capacity. This will tighten the supply-demand balance over the next three years.
We now see power prices recovering to 2019 levels in 2021, as they benefit from the rise in commodity prices seen since the beginning of the year, which led us to revise our forecasts for Title Transfer Facility (TTF) in 2021 to $15 per million Btu (/mmBtu) from our previous expectation of $8/mmBtu (for more information, see "Short-Term Gas Price Assumptions Raised On Robust Demand And Producer Discipline," published Aug. 13, 2021, on RatingsDirect). For generators, the financial impact of much lower power prices than we expected in 2020 was generally manageable, thanks to price hedges and a more-contracted generation mix.
We expect even higher, more credit-supportive prices by 2022. A recovery in power prices in 2022 and 2023, to well above 2019 levels in almost all European main markets, should underpin earnings for merchant power generators that provide baseload power, such as nuclear or hydro. We expect European TTF gas prices to remain volatile because of the continent's declining production, more uncertain volumes of inflow from Russia, volatile carbon prices, massive storage capacity, well-developed gas infrastructure, and location, making it a natural market of last resort for global liquefied natural gas (LNG) flows, which are fundamentally exposed to global gas industry developments.
More importantly, solar and wind power will only gradually fill the gap, which implies tightening supply at least in 2022-2023. We also see ongoing hurdles to deploy and connect these new projects, including complex permitting process and network bottlenecks both to connect these new sites to the grid and to effectively transmit this power to areas of high consumption. This is, for example, the case in the U.K. and in Germany, where new wind capacity coming from the northern part of each country might face challenges to be distributed in more densified and industrialized southern areas. This supports our assumption of sustainably high power prices.
After 2023, we believe lower gas prices and accelerated commissioning of renewables will likely lead to a slow decline in power prices--despite our expectations of sustainably high carbon prices. Indeed, Europe plans renewables to increase to about 48% of the European electricity mix in 2030, from about 20% in 2020, excluding hydro's 10% share.
Our base-case power price assumptions represent actual price hedges that the main rated generators in each market have contracted, together with our view of the market's forward power prices over the coming two years and S&P Global Platts Analytics' forecasts of daily spot market prices (see chart 1). These base-case assumptions therefore reflect realized prices for power generators rather than a future price curve.
Sep 20, 2021 10:35
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