The first half of 2020 has been so far carved in everyone’s memory for its unprecedented events that would shape our future. The year so far is themed with buzzwords that are far away from optimism. The first half of 2020 has witnessed the world going into unprecedented draconian lockdown, dipping into a major recession, pessimism hanging over every aspect of the financial market, and 500,000 deaths caused by the pandemic. Below, we are briefly reviewing the first semester of 2020 focusing on the European energy market.
The pandemic: Towards the end of December 2019, Wuhan’s government announced treating dozens of patients of pneumonia cases of unknown causes. One month later, the whole province went under lockdown as Chinese researchers identified the infectious Covid-19. In February, Europe got its first cases with Italy recording the largest numbers of death and infections per day. In mid-March, Europe as a result imposed a draconian lockdown on its citizens and residents, shut internal borders as well as international borders. The continent witnessed major lives and financial losses, but after decreasing the risk of infection, the bloc opened its internal borders in early June and its international border to 14 safe countries, excluding Brazil, the U.S., and Russia, starting 1 July.
The oil market: January 2020 started off with war threats between the U.S. and Iran for the assassination of the Iranian guard commander Qasim Soulaimani. The move led Iran to pledge retaliation and ended its commitment to the nuclear deal on 5 January. The move was seen as a great threat and led Brent oil prices to reach its year high, at $65.56 per barrel. The spike in oil price deteriorated later as Russia and Saudi Arabia entered a flexing muscle game where the latter opened its oil taps and increased production. The production increase had to be curbed later on COVID-19 developments as OPEC+ member states agreed on historic production cuts of 9.7 million barrels per day to save oil prices from dipping further as WTI May-20 contract fell to a never seen $-37 per barrel and Brent hit $26.
The European gas market: The European natural gas market has been witnessing a persistent bearish sentiment since the end of Q4 2019 stretching into 2020. The factors behind the cheap gas include the healthy supply outlook caused by the abundance of LNG supply to the continent, healthy and currently glutted storages as a direct consequence to COVID-19, the mild winter Europe witnessed this year and the struggling demand recovery pace. The Dutch TTF front year contract lost 27% of its January maximum value by the end of June, which could have made it more attractive than other energy sources, demand remained weak though. In the last two months, European gas prices started stabilizing on rising tensions on the Nordstream-2 gas pipeline project. In June, the U.S. renewed its threats against the project which is to provide Germany with gas from Russia. Germany claimed this as a direct threat to the European and German sovereignty as new sanctions could be directed to companies and German officials facilitating the project. This is not the only threat currently waved by the U.S. though. The country European goods varying from olives until trucks and aircrafts. The trade war waged since January 2020 by President Donald Trump, who imposed a steel and aluminium tariff to slap the European automotive sector, to decrease European goods’ competitiveness on the American market as it doubles their prices.
French nuclear phase-out: French Power has also seen major changes as a result of the low demand. In June, France shut down its oldest nuclear reactor, Fessenheim 2 (880 MW capacity), as the country seeks a 50% reduction in its nuclear power generation by 2035. Earlier in April, EDF announced a 20% reduction in its nuclear output on coronavirus surging cases, and lower demand. French power, therefore, witnessed large fluctuations and price hikes compared to other commodities in the energy mix. The uncertainty about the available French nuclear capacities might have contributed to the stagnation of the European gas prices as the missing nuclear production might have to be replaced by gas to secure power supply to costumers.
EU recovery fund and the Green Deal: On the climate action front, one of the two pillars of the 750 billion euro recovery package proposed by the European Commission is the decarbonisation of Europe. Germany has been aggressively pushing for the Green Deal agenda and more ambitious emission reduction targets for the years 2030 and 2050. The country along with France is championing Europe’s green transition plans and supporting a minimum carbon price and the implementation of a carbon border adjustment mechanism on the CO2 content of imported products. In June, the German cabinet approved a law for reducing lignite use as 9.1% of the country’s 2019 power output came from the heavily polluting fuel. Germany is also preparing the national carbon tax that would be enacted by January 2021. The tax will cover sectors outside the EU ETS such as transport and heating. The scheme starts at 25 euros in 2021, with gradual increases to 55 euros by 2026.
Outlook for the summer
In July, the focus of European investors will be on if the member states are able to agree on the fund to restore the region’s economy and on the long term budget of the Union. Although major economies like Germany and France support the proposal, a handful of countries are still in opposition.
The UK’s window to ask for an extension of the transition period in the separation process from the EU also ends in July. Although an extension could be justified by the fact that the pandemic delayed negotiations, the British government excludes the possibility of asking for an extension. The German Chancellor has warned several times that the EU has to be prepared for a hard Brexit as a possible scenario.
In July, 80.7 million emission allowances will be offered by the European member states and the UK, 20.7% more than in June. In August, the auction volume falls as usual by more than 50% to 37.4 million.
From 16 July, the European Commission starts auctioning allowances from the Innovation Fund increasing the daily volume of the auctions. The auction calendar includes an even distribution of the 50 million allowances for the Innovation Fund through the remaining auctions in 2020. The revenue from the auctioning of these allowances can be used for innovative low-carbon technologies and processes in energy intensive industries, including products substituting carbon intensive ones, carbon capture and utilisation (CCU), construction and operation of carbon capture and storage (CCS), innovative renewable energy generation and energy storage.
Before their summer recess, European lawmakers will also discuss the Green Deal as there is still a major rift between western and eastern member states. The European Commission is scheduled to publish its impact assessment of raising the EU’s 2030 emission reduction target to 50-55% from the current 40% in autumn.
According to the statistics of the last 7 years, the carbon price tends to post gains in July and August and this year does not seem to be an exemption with the benchmark carbon contract hitting an 11-month high close to 30 euro in the first days of July.