In April 2023, there were some remarkable developments in the energy markets. The EU is paving the way for a stringent ETS (Emissions Trading System). In mid-April, the last nuclear power plants were shut down, effectively sealing the fate of nuclear power in Germany. The EU platform for centralised gas procurement is now accepting its first offers. Despite suboptimal weather conditions, renewable energy sources reliably continue to deliver electricity.

In The weather in April 2023 was unusually cold and rainy in Germany. However, it was not a particularly bad month for renewable energies. In particular, onshore wind power consistently contributed a significant share of renewable electricity in the grid, with feed-ins reaching up to 30 GW. Overall, onshore wind power covered 22% of the total energy demand in the past month. Compared to the previous year, April (23%) had a similar level of wind intensity as in 2022

However, the rainy weather conditions were not favourable for solar power generation. Solar energy contributed slightly less at 14% compared to onshore wind power. Biomass, brown coal, and nuclear power primarily covered the base load. After the shutdown of nuclear power in mid-April, brown coal stepped in to fill the gap. Overall, brown coal accounted for around 21% of the German electricity mix, closely following wind power. Hard coal and natural gas each contributed approximately 9% and 8% respectively, making them roughly equal in their contributions.

Figure 1: public electricity generation

The EU is paving the Way for a stringent ETS

The EU Council formally adopted the reform of the EU Emissions Trading System (EU ETS) in April 2024, paving the way for more ambitious climate protection beyond the borders of the EU. However, how exactly is this supposed to work? Here is a brief overview:

The EU Emissions Trading System (EU ETS) is one of the EU’s most important instruments in the fight against climate change and achieving climate neutrality by 2050. It ensures the market-based pricing of greenhouse gas emissions (GHG emissions) for selected industries, creating incentives for efficiency improvements and investment in climate-friendly technologies. However, the effectiveness of the EU ETS has been repeatedly criticized since its introduction.

During the second trading period, significant surpluses of allowances were accumulated. The highest surplus of allowances reached over two billion certificates in 2013. The result was a less ambitious and less effective carbon price. In response, policymakers further reformed the ETS to strengthen its effectiveness and resilience. Among other measures, controversial allowances from Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs) were abolished. These were seen as one of the causes of the high surpluses.

Companies were able to offset emissions by financing climate protection projects in developing countries and receiving certificates in return. The EU also expanded the ETS by introducing a market stability reserve mechanism. This mechanism aims to maintain the number of certificates within a tolerance range. In case of exceeding or falling below certain thresholds, the mechanism releases or retains additional certificates, thereby cushioning the impact of economic fluctuations, such as a recession, on certificate demand and price.

Now, the European Parliament has reached a preliminary political agreement on further ETS reforms. These reforms are part of the “Fit for 55” package, which aims to reduce EU GHG emissions by 55% by 2030 compared to 1990.

One of the most far-reaching changes to the EU ETS is the introduction of the Carbon Border Adjustment Mechanism (CBAM). This mechanism aims to prevent companies from producing goods with lower environmental standards abroad and importing them into the EU. The mechanism imposes import duties on goods with high emission levels at EU borders. The gradual introduction of the CBAM is currently planned to begin in 2026. Furthermore, the scope of the ETS will be gradually expanded to include the buildings and transportation sectors (both road transport and shipping). EU policymakers have also adjusted the ETS caps to ensure a 62% reduction in emissions from the covered sectors compared to 2005.

Critics, particularly environmental organizations, argue that the annual reduction of certificates does not go far enough to achieve the 1.5-degree target. Others fear that the international market may perceive the Carbon Border Adjustment Mechanism as protectionist, leading to trade conflicts. Despite all the criticism, the reform represents a significant step towards climate neutrality.

Source: Veröffentlichungen: Europäischer Rat

The End of nuclear Power in Germany

It is done. In the night from April 15th to 16th, the last three German nuclear power plants were taken offline. The whole process was accompanied by heated debates with old arguments. From energy security to climate protection, market participants revisited familiar points. Nevertheless, what is the truth behind it?

Because of the nuclear disaster in Fukushima, the German government initiated the phase-out of nuclear power generation in 2011. This phase-out was supposed to be completed by the end of 2022 with the shutdown of Isar II, Emsland, and Neckarwestheim 2. However, due to the turbulence in the international energy markets following the Ukraine-Russia conflict, the phase-out was postponed. The goal was to ensure energy security in the German electricity market under all circumstances and stabilize the market. However, in the night from April 15th to 16th, 2023, it was finally over, and the last three reactors were taken offline.

With the gradual decommissioning of nuclear power plants since 2011, their share in the German electricity mix has also decreased. The resulting gap has been gradually compensated by other energy sources. In the early 2000s, nuclear power accounted for over 30% of gross electricity production. By 2008, this share had already been reduced from 28% to 16% by 2012.

After a brief period of stagnation in 2013 and 2014, the phase-out gained momentum again. The largest decline occurred between 2021 and 2022. Within these years, the share of nuclear power in the total generation decreased from about 12% to approximately 6%. The shutdown of the Grohnde, Brokdorf, and Gundremmingen C nuclear power plants resulted in the removal of about 30 TWh of annual production from the grid. The remaining three power plants contributed only 34 TWh of nuclear generation to the grid. Since mid-April 2023, nuclear power generation has completely ceased.

Considering the remaining electricity mix in this context, some correlations can be drawn. The missing 50 TWh of nuclear power generation between 2008 and 2012 were compensated by a slight increase in lignite coal generation, but particularly by a significantly increased share of renewable energy. During this period, the share of renewable energy in gross electricity generation rose from 14 % to nearly 23 %  and almost single-handedly compensated for the missing energy volume.

The subsequent years also showed a similar trend. In general, the massive expansion of renewables replaced the missing energy from nuclear power. In fact, renewables even displaced coal to such an extent that the share of coal generation decreased from 44% in 2012 to 24% in 2020. Only the crisis years from 2020 to 2022 brought a minor resurgence for coal, causing its share to rise sharply to 31%. The share of renewables continued to rise during this time and accounted for the majority of the German electricity mix in 2022, reaching 44%.

Shut down of nuclear Plants on April 15, 2023

However, what did the night of April 15th actually look like? Which power plants replaced the shut-down nuclear power plants? Moreover, what has been happening to the spot price since the shutdown?

Figure 1 below illustrates the generation profile for April 2023. The nuclear generation (depicted in yellow in the figure) gradually decreases towards midday. In the following week, it is evident that in the short term, this gap in electricity generation was filled by ramping up coal-fired power plants (particularly lignite coal).

By comparing the weeks before and after the shutdown of the nuclear power plants, it becomes clear that the missing 5.6% of nuclear generation was compensated for by a 1.2% increase in lignite coal, a 3.5% increase in hard coal, and an approximately 1% increase in gas-fired generation. Therefore, in the short term, thermal power plants stepped in to replace nuclear power. Looking at the spot market, it is also evident that prices remained stable.

Figure 2 depicts the spot market prices one week before and after the shutdown of the nuclear power plants. The green line approximately marks April 15th, 2023. When comparing the week before with the week after the shutdown, no significant changes are observed. Both the overall price level and the price volatility are similar to each other. This suggests that there are more influential determinants affecting the spot price than the available quantity of nuclear power.

Figure 2: Spot prices April 2023

Source: EnergyChartsENTSOE Transparency Platform

EU agrees on joint gas procurement

In 2022, the EU implemented a platform for joint gas procurement across the EU. This initiative has now entered the next phase, with the acceptance of the first bids on April 25th.

As the world’s largest gas importer, the EU has become heavily dependent on external sources for its energy supply. The Russian attack on Ukraine in 2022 vividly illustrated this vulnerability. Economic sanctions and numerous disputes led to extreme price fluctuations in the gas markets. In order to ensure gas supply during the winter months and maintain sufficient gas reserves, parts of the required gas quantities had to be procured at very high prices. These increased procurement costs placed a significant burden on some energy suppliers, who in turn passed them on to consumers through higher heating costs.

The impact of these higher costs was not limited to heating alone. The increasing gas prices also affected the electricity markets. This effect is described by the merit order, which arranges the sequence of electricity-generating power plants based on increasing marginal costs. The price in the electricity market is then determined by the last power plant needed to meet the demand. Gas power plants, due to their good controllability, often come into play during peak times and influence the market price. Thus, the high gas prices also had an impact on the electricity market. Companies in the manufacturing sector passed on these increased energy costs to end customers through higher prices. This resulted in high inflation rates and significant real wage losses for large sections of the population, which had to be mitigated by policy interventions. (See also: Energy Brainpool: War, gas shortage, and extreme prices)

After the import of Russian gas, which constituted a major portion of the imported quantities, came to a complete halt, the search for alternative trading partners on the international markets began. The EU established a common platform for this purpose to coordinate the joint procurement of gas.

The goal is for EU member states to collectively utilize their market weight and avoid outbidding each other, thereby seeking mutually beneficial partnerships with reliable suppliers. Currently, companies and countries within the EU can submit their gas demand requests on this platform to collectively procure the required quantities from the global market. Potential suppliers (excluding Russia) can submit their offers on this platform to meet the demand. This ensures a higher level of transparency. On April 25th, 2023, the platform was officially launched, and initial demand requests for the upcoming winter season were accepted. This represents a significant milestone towards creating a transparent, competitive, and integrated EU energy market. In the future, this platform could also facilitate hydrogen trading…

Source: Europäische Kommission, Montel

Have Gas prices returnt to Pre-war Levels?

In the aftermath of the Russia-Ukraine conflict, gas prices on the wholesale market skyrocketed to unprecedented levels (see also: Energy Brainpool: War, Gas Shortage, and Extreme Prices). The fear of scarcity further fuelled market sentiment. If a market participant needed to procure gas on a day-ahead basis, they could end up paying exorbitant prices exceeding 250 EUR/MWh during the storage-filling season. However, the spot market has since significantly stabilized. But what does the market foresee for the future? What has changed?

To assess the market’s outlook, we utilize the Price Forward Curve (PFC). This curve illustrates the historical spot market price trajectory and extends the price curve into the future based on current traded monthly, quarterly, and yearly contracts. By comparing different PFCs, one can glean insights into the general sentiment prevailing in the gas market. The spot market curve reveals that both volatility and prices climbed to higher levels in 2021.

This trend was further amplified after February 2022 but soon subsided, only to gain momentum again shortly before the heating season. Currently, the spot market has calmed down, and we find ourselves at a similar level as before the war. For the year 2024, February 2022’s projections stood at 34 EUR per megawatt-hour. However, these forecasts have significantly increased and now hover around 54 to 58 EUR per megawatt-hour.

A similar pattern emerges for 2025 and 2026. While February 2022’s projections indicated prices of 27 EUR (2025) and 24 EUR (2026), the current forecasts depict significantly higher figures of 50 EUR (2025) and 39 EUR (2026). In summary, the initial shock caused by supply stoppages and political discord has been overcome. However, the markets anticipate a significantly higher price level for the future compared to pre-war times. The sustainability of these developments remains to be seen. Nonetheless, it is expected that gas prices will never be as low as they were before February 2022.

Figure 3: Price-Forward-Curve Feb 2022 (Source: Montel) Figure 4: Price-Forward-Curve May 2023 (Source: depiction by Energy Brainpool) Are you looking to understand the electricity market and consider yourself a beginner or new to the industry? Then we recommend our live online training