1 00:00:00,640 --> 00:00:03,080 Speaker 1: This is Kamala Schelling and you're listening to Switched on, 2 00:00:03,200 --> 00:00:05,960 Speaker 1: the podcast brought to you by Bloomberg NEF. Today we're 3 00:00:05,960 --> 00:00:08,920 Speaker 1: bringing you another analyst reaction podcast, and this time it's 4 00:00:08,920 --> 00:00:11,399 Speaker 1: about how the war in Iran is impacting power prices 5 00:00:11,440 --> 00:00:14,480 Speaker 1: in Europe. Oil and gas prices are rising around the world, 6 00:00:14,560 --> 00:00:17,840 Speaker 1: and consumers and policy makers are justifiably concerned about what 7 00:00:17,920 --> 00:00:20,919 Speaker 1: this will mean for electricity bills. But so far, European 8 00:00:20,960 --> 00:00:23,680 Speaker 1: power prices have remained well below the peaks seen during 9 00:00:23,680 --> 00:00:26,880 Speaker 1: the twenty twenty two energy crisis, which followed Russia's invasion 10 00:00:26,880 --> 00:00:29,720 Speaker 1: of Ukraine. That's partly because twenty twenty two was a 11 00:00:29,720 --> 00:00:32,400 Speaker 1: perfect storm of shocks to the power system, but it's 12 00:00:32,400 --> 00:00:35,000 Speaker 1: also because Europe's power system has changed in the past 13 00:00:35,000 --> 00:00:37,640 Speaker 1: few years. That's not to say, however, that Europe is 14 00:00:37,680 --> 00:00:40,479 Speaker 1: totally in the clear. So how exposed is the continent 15 00:00:40,640 --> 00:00:42,960 Speaker 1: to this gas shock and the one that comes next. 16 00:00:43,360 --> 00:00:46,839 Speaker 1: On today's show, we're joined by Kssavartini Savarimutu Binef's head 17 00:00:46,840 --> 00:00:49,839 Speaker 1: of European Power to discuss her Note Iran war hasn't 18 00:00:49,840 --> 00:00:53,880 Speaker 1: sparked a new European energy crisis yet, BNF clients can 19 00:00:53,920 --> 00:00:56,360 Speaker 1: find Kesha's note and other BNF research relating to the 20 00:00:56,400 --> 00:00:59,320 Speaker 1: implications of the ongoing Iran war by heading to BNF 21 00:00:59,360 --> 00:01:02,320 Speaker 1: go on the bloom terminal or at BNF dot com. 22 00:01:02,560 --> 00:01:04,640 Speaker 1: If you'd like to learn more about how BNF approaches 23 00:01:04,640 --> 00:01:08,640 Speaker 1: strategy research on the energy transition, including developments and commodity markets, 24 00:01:08,800 --> 00:01:11,960 Speaker 1: trends across different sectors, and the cross cutting technologies shaping 25 00:01:12,000 --> 00:01:16,000 Speaker 1: the future, you can find more information on BNF dot com, 26 00:01:16,040 --> 00:01:17,600 Speaker 1: and if you'd like to speak with a member of 27 00:01:17,600 --> 00:01:21,280 Speaker 1: our team about becoming a client, email US Sales dot 28 00:01:21,319 --> 00:01:24,679 Speaker 1: BNF at Bloomberg dot net. All right, let's get into 29 00:01:24,720 --> 00:01:27,120 Speaker 1: the conversation and hear how Europe is trying to soften 30 00:01:27,120 --> 00:01:38,960 Speaker 1: the blow of soaring energy prices. Kesha, Welcome to the 31 00:01:39,000 --> 00:01:42,200 Speaker 1: podcast Glad to be Hit. Oil and gas prices are 32 00:01:42,280 --> 00:01:45,640 Speaker 1: rising dramatically around the world, but you've written that European 33 00:01:45,720 --> 00:01:49,000 Speaker 1: power prices are staying relatively moderate. So we're recording this 34 00:01:49,440 --> 00:01:53,640 Speaker 1: late morning, Monday, London time. Right now, where are European 35 00:01:53,720 --> 00:01:56,800 Speaker 1: power prices so as off now? And when you look 36 00:01:56,880 --> 00:02:01,320 Speaker 1: at month ahead power prices across Northwest Europe that includes Germany, 37 00:02:01,440 --> 00:02:03,840 Speaker 1: Fronts and Belgium Netherlands. 38 00:02:03,880 --> 00:02:06,919 Speaker 2: We are at around ninety two hundred euros per macaw 39 00:02:06,920 --> 00:02:10,000 Speaker 2: at our levels now, and prices for the winter are 40 00:02:10,120 --> 00:02:12,040 Speaker 2: a little bit higher. They're at around one hundred and 41 00:02:12,040 --> 00:02:14,480 Speaker 2: forty euros per mac about hour, But that's a lot 42 00:02:14,560 --> 00:02:17,880 Speaker 2: lower than the one thousand euros permacat our price levels 43 00:02:17,880 --> 00:02:21,160 Speaker 2: we saw during the twenty twenty two energy crisis, just 44 00:02:21,200 --> 00:02:24,240 Speaker 2: to put the situation today in context. But that being said, 45 00:02:24,320 --> 00:02:27,080 Speaker 2: the story is still developing, so we'll have to see 46 00:02:27,080 --> 00:02:30,120 Speaker 2: how long the situation persists and what that does to 47 00:02:30,160 --> 00:02:31,320 Speaker 2: European powerl prices. 48 00:02:31,840 --> 00:02:34,359 Speaker 1: So it sounds like gas prices are really having an 49 00:02:34,400 --> 00:02:35,959 Speaker 1: impact on all of this. And I want to ask 50 00:02:35,960 --> 00:02:38,560 Speaker 1: you a super late person question, which is so many 51 00:02:38,600 --> 00:02:40,959 Speaker 1: of the headlines we're seeing about the disruptions in the 52 00:02:41,000 --> 00:02:42,680 Speaker 1: war and iron have to do with one hundred dollars 53 00:02:42,680 --> 00:02:45,360 Speaker 1: barrel of oil. So is gas actually far more important 54 00:02:45,400 --> 00:02:49,040 Speaker 1: for power prices than oil in Europe or around the world. 55 00:02:49,639 --> 00:02:52,520 Speaker 2: Yes, I would say, because in Europe you are relying 56 00:02:52,720 --> 00:02:57,240 Speaker 2: on gas more than oil. And this is especially more 57 00:02:57,280 --> 00:03:00,200 Speaker 2: evident now, I mean less so compared to five years go. 58 00:03:00,280 --> 00:03:02,519 Speaker 2: And when it comes to gas, we rely on gas 59 00:03:02,520 --> 00:03:05,880 Speaker 2: for power generation. We rely on gas to heat our houses, 60 00:03:06,040 --> 00:03:08,400 Speaker 2: and also we rely on gas to a certain extent 61 00:03:08,560 --> 00:03:11,400 Speaker 2: to power our industries. I mean, there are some industrial 62 00:03:11,440 --> 00:03:14,440 Speaker 2: bases that still rely on oil, but gas takes up 63 00:03:14,480 --> 00:03:17,519 Speaker 2: a much larger share of that portion compared to oil. 64 00:03:17,919 --> 00:03:20,320 Speaker 1: Let's go back to that amazing number you just mentioned, 65 00:03:20,360 --> 00:03:22,040 Speaker 1: which is that at the height of the twenty twenty 66 00:03:22,040 --> 00:03:25,000 Speaker 1: two energy crisis, power was casting around one thousand euros 67 00:03:25,000 --> 00:03:28,240 Speaker 1: a megawatt hour. What made them spike so much at 68 00:03:28,240 --> 00:03:29,480 Speaker 1: that point in time, So. 69 00:03:29,520 --> 00:03:32,160 Speaker 2: Twenty twenty two was a perfect storm. It had all 70 00:03:32,240 --> 00:03:35,880 Speaker 2: the right ingredients that made for a catastrophic power markets disaster. 71 00:03:36,080 --> 00:03:38,880 Speaker 2: So it's started with Russia cutting its gas supply to Europe. 72 00:03:38,920 --> 00:03:42,160 Speaker 2: But that point in time, Europe was relying on pipeline 73 00:03:42,200 --> 00:03:45,000 Speaker 2: gas or Russia pipeline gas for about forty percent of 74 00:03:45,040 --> 00:03:48,000 Speaker 2: its gas supply. And when it comes to power system, 75 00:03:48,080 --> 00:03:51,560 Speaker 2: Europe was also more relatively reliant on gas for power 76 00:03:51,640 --> 00:03:54,840 Speaker 2: generation than it is now, so gas set prices in 77 00:03:54,880 --> 00:03:58,160 Speaker 2: the power market more often than now. Now we have 78 00:03:58,520 --> 00:04:02,680 Speaker 2: more renewables that helps reduce the frequency of gas setting prices. 79 00:04:02,960 --> 00:04:05,640 Speaker 2: So in twenty twenty two, the pass through from gas 80 00:04:05,720 --> 00:04:08,760 Speaker 2: price shock to power prices was a lot more prevalent 81 00:04:08,840 --> 00:04:11,600 Speaker 2: than it is today. At the same time, we also 82 00:04:11,840 --> 00:04:16,040 Speaker 2: had French nuclear power outage. The French nuclear fleet saw 83 00:04:16,080 --> 00:04:19,800 Speaker 2: the worst performance in years, and just to take a 84 00:04:19,880 --> 00:04:23,400 Speaker 2: step back, I described French nuclear fleet as the backbone 85 00:04:23,440 --> 00:04:26,960 Speaker 2: of Northwest European power supply, and when half of the 86 00:04:27,000 --> 00:04:31,239 Speaker 2: fleet was down due to outages, power exports from France fell. 87 00:04:31,440 --> 00:04:34,240 Speaker 2: It was the first time in history that France actually 88 00:04:34,279 --> 00:04:38,760 Speaker 2: became a net power importer, and therefore neighboring markets had 89 00:04:38,760 --> 00:04:42,720 Speaker 2: to burn more gas to export to France, so that 90 00:04:42,800 --> 00:04:44,680 Speaker 2: made things a lot worse. At the same time, you 91 00:04:44,720 --> 00:04:48,120 Speaker 2: also had a very hot summer and there was a 92 00:04:48,200 --> 00:04:52,160 Speaker 2: drought in Iberia which impacted hydropower availability. So you can 93 00:04:52,200 --> 00:04:54,760 Speaker 2: see how all of these factors combined to just give 94 00:04:54,839 --> 00:04:59,479 Speaker 2: us the perfect disaster and added to supply shortage risks 95 00:04:59,640 --> 00:05:02,120 Speaker 2: that drove out prices really high. 96 00:05:02,160 --> 00:05:04,760 Speaker 1: You mentioned renewables, and you've written a lot about how 97 00:05:04,839 --> 00:05:07,640 Speaker 1: the fundamentals of the power system in Europe have changed 98 00:05:07,760 --> 00:05:10,279 Speaker 1: even in the relatively short period of time since twenty 99 00:05:10,320 --> 00:05:13,680 Speaker 1: twenty two, So how exactly has this influx of renewables 100 00:05:13,800 --> 00:05:16,080 Speaker 1: changed the calculus on European power prices. 101 00:05:16,400 --> 00:05:19,080 Speaker 2: Yeah, so I would say that Europe is more resilient 102 00:05:19,200 --> 00:05:22,000 Speaker 2: today than it was five years ago, and that's renewables 103 00:05:22,040 --> 00:05:24,040 Speaker 2: is a big part of this story. When we look 104 00:05:24,080 --> 00:05:27,480 Speaker 2: at the power supply site, Europe has more than doubled 105 00:05:27,520 --> 00:05:31,320 Speaker 2: its renewables capacity and that means we are less reliant 106 00:05:31,320 --> 00:05:34,800 Speaker 2: on gas to produce electricity. So today Europe's wind and 107 00:05:34,839 --> 00:05:37,960 Speaker 2: solar fleet is around six hundred and fifty gigawats and 108 00:05:38,000 --> 00:05:40,480 Speaker 2: that is more than double compared to twenty twenty two. 109 00:05:40,839 --> 00:05:43,800 Speaker 2: And the momentum that we've built over the past couple 110 00:05:43,800 --> 00:05:46,560 Speaker 2: of years puts us on track to reaching around one 111 00:05:46,600 --> 00:05:50,440 Speaker 2: thousand gigawarts of solar and wind capacity in twenty thirty. 112 00:05:50,720 --> 00:05:53,640 Speaker 2: So all of this renewable capacity growth has enabled us 113 00:05:53,680 --> 00:05:57,200 Speaker 2: to burn less gas for power and on average today 114 00:05:57,200 --> 00:06:01,440 Speaker 2: in markets like Germany and Great Britain. In Spain, during 115 00:06:01,480 --> 00:06:04,839 Speaker 2: a summer typical summer period, you can expect solar and 116 00:06:04,880 --> 00:06:07,600 Speaker 2: win to make up forty percent of power supply, and 117 00:06:07,680 --> 00:06:11,680 Speaker 2: all that increase in renewables eats into the share of gas. 118 00:06:11,839 --> 00:06:15,440 Speaker 2: So you can see how structurally scaling up renewables has 119 00:06:15,560 --> 00:06:18,560 Speaker 2: led to a situation where we rely less on gas 120 00:06:18,600 --> 00:06:19,640 Speaker 2: for power generation. 121 00:06:20,080 --> 00:06:22,599 Speaker 1: So all these renewables you're talking about that's changing the 122 00:06:22,640 --> 00:06:25,640 Speaker 1: supply of power, has the nature of demand also changed? 123 00:06:25,920 --> 00:06:29,280 Speaker 2: Yes, absolutely, So when you look at power demand across Europe, 124 00:06:29,360 --> 00:06:33,760 Speaker 2: we have first been seeing stagnating demand compared to twenty 125 00:06:33,800 --> 00:06:37,120 Speaker 2: twenty two. Power demand in fact, in some markets has 126 00:06:37,200 --> 00:06:41,240 Speaker 2: been dropping and this is partly a result of structural 127 00:06:41,279 --> 00:06:43,920 Speaker 2: demand reduction that we've been tracking. And there are few 128 00:06:43,960 --> 00:06:45,640 Speaker 2: factors that contribute to this. 129 00:06:45,920 --> 00:06:46,480 Speaker 1: Number One. 130 00:06:46,640 --> 00:06:49,800 Speaker 2: During twenty twenty two, there were lots of grunts and 131 00:06:49,800 --> 00:06:54,040 Speaker 2: schemes to increase the uptake of rooftop solar, for example, 132 00:06:54,120 --> 00:06:56,360 Speaker 2: so someone like you and me, we want to reduce 133 00:06:56,400 --> 00:06:58,800 Speaker 2: our exposure to high prices, so it makes sense for 134 00:06:58,920 --> 00:07:03,080 Speaker 2: us to install room top solar, and that means we 135 00:07:03,160 --> 00:07:06,200 Speaker 2: are relying less on grid for power demand, so that 136 00:07:06,240 --> 00:07:09,640 Speaker 2: translates into lower grid demand and these are the portion 137 00:07:09,720 --> 00:07:12,200 Speaker 2: of demand that will not come back. So that's part 138 00:07:12,240 --> 00:07:14,720 Speaker 2: of the story. And the second one is because of 139 00:07:14,840 --> 00:07:17,560 Speaker 2: higher energy prices in Europe, we've seen a lot of 140 00:07:17,560 --> 00:07:21,440 Speaker 2: demand destruction on the industrial side. So for example, when 141 00:07:21,440 --> 00:07:25,160 Speaker 2: we look at gas consumption in industries, we are consuming 142 00:07:25,240 --> 00:07:28,640 Speaker 2: twenty percent lesser today than we did in twenty twenty two. 143 00:07:28,680 --> 00:07:31,520 Speaker 2: And part of the reason is lots of energy intensive 144 00:07:31,560 --> 00:07:36,320 Speaker 2: industries have relocated to cheaper areas and also again these 145 00:07:36,360 --> 00:07:39,680 Speaker 2: translate into demand that we will not come back to Europe. 146 00:07:39,920 --> 00:07:43,240 Speaker 2: And of course we have also consumer behavior. A lot 147 00:07:43,320 --> 00:07:46,920 Speaker 2: of people are now more aware about energy prices and 148 00:07:46,960 --> 00:07:50,360 Speaker 2: their behaviors and how that can translate into reducing your 149 00:07:50,400 --> 00:07:54,600 Speaker 2: electricity bill costs. So consumers are a lot more aware 150 00:07:54,840 --> 00:07:57,760 Speaker 2: and we are a lot more in touch when it 151 00:07:57,840 --> 00:08:01,440 Speaker 2: comes to changing our behavior to keep energy prices low. 152 00:08:01,720 --> 00:08:04,280 Speaker 1: But even with all of these structural changes we've talked about, 153 00:08:04,400 --> 00:08:06,680 Speaker 1: it seems that Europe is still very, very reliant on 154 00:08:06,760 --> 00:08:08,960 Speaker 1: fossil fuels for power. And in fact, you've written about 155 00:08:08,960 --> 00:08:12,679 Speaker 1: how this current crisis could be a boon for European coal. 156 00:08:12,960 --> 00:08:15,240 Speaker 1: So despite the fact that Europe has tried to diversify 157 00:08:15,280 --> 00:08:17,680 Speaker 1: its gas sources, despite the fact that there are now 158 00:08:17,720 --> 00:08:21,800 Speaker 1: all these renewables, does the continent's power system still rely 159 00:08:21,960 --> 00:08:24,560 Speaker 1: on fossil fuels and is it vulnerable going forward? 160 00:08:24,960 --> 00:08:28,000 Speaker 2: Yes, we still do rely on fossil fuel. So although 161 00:08:28,000 --> 00:08:31,200 Speaker 2: we have reduced our relyan set doesn't make us completely 162 00:08:31,200 --> 00:08:35,600 Speaker 2: independent yet and just to give you a context, right now, 163 00:08:35,640 --> 00:08:38,440 Speaker 2: we rely on for power sector. We rely on gas 164 00:08:38,480 --> 00:08:41,600 Speaker 2: and coal for power generation. Markets like Germany is a 165 00:08:41,679 --> 00:08:44,800 Speaker 2: case in point where since the war broke out, since 166 00:08:44,840 --> 00:08:47,640 Speaker 2: gas prices went up, coal power plants are now more 167 00:08:47,640 --> 00:08:50,760 Speaker 2: economical to run, so we've seen a fair amount of 168 00:08:50,960 --> 00:08:53,880 Speaker 2: gas to coal fuel switching. So that fuel switching is 169 00:08:53,920 --> 00:08:58,840 Speaker 2: helping Germany to reduce its gas demand for power. However, 170 00:08:59,000 --> 00:09:01,800 Speaker 2: it's coal fleet is not going to last forever because 171 00:09:01,840 --> 00:09:06,240 Speaker 2: there are legislated coal face out plans across Europe. Germany 172 00:09:06,360 --> 00:09:08,920 Speaker 2: has planned to close all of its coal fleet by 173 00:09:08,960 --> 00:09:12,720 Speaker 2: twenty thirty eight. In fact, according to the face out Shuttle, 174 00:09:12,880 --> 00:09:15,040 Speaker 2: it's on track to close five kick Awards in the 175 00:09:15,120 --> 00:09:17,720 Speaker 2: next three years. So that's a lot of coal capacity 176 00:09:17,760 --> 00:09:21,240 Speaker 2: that's going to leave the system. So although the overall 177 00:09:22,040 --> 00:09:25,960 Speaker 2: fossil fuel consumption is coming down, with coal going out 178 00:09:26,000 --> 00:09:28,400 Speaker 2: of the system, pretty soon we will have a power 179 00:09:28,400 --> 00:09:33,440 Speaker 2: system that is more reliant on gas to plug that gap. So, yes, 180 00:09:33,559 --> 00:09:36,240 Speaker 2: the story of fossil fuels reducing, but the share of 181 00:09:36,360 --> 00:09:39,199 Speaker 2: gas within that makes us going to increase when all 182 00:09:39,240 --> 00:09:43,679 Speaker 2: of the coal assets retire. That being said, any future 183 00:09:43,720 --> 00:09:46,880 Speaker 2: disruption in gas power supply could be more dangerous if 184 00:09:46,920 --> 00:09:49,559 Speaker 2: we don't have the gas to coal fuel switching potential. 185 00:09:50,040 --> 00:09:52,200 Speaker 1: Kesha, thank you so much for coming in to speak today. 186 00:09:52,559 --> 00:10:04,439 Speaker 1: Thank you. Today's episode of Switched On was produced by 187 00:10:04,520 --> 00:10:08,680 Speaker 1: Cam Gray with production assistance from Kamala Shelling. Bloomberg NIF 188 00:10:08,880 --> 00:10:12,040 Speaker 1: is a service provided by Bloomberg Finance LP and its affiliates. 189 00:10:12,120 --> 00:10:14,800 Speaker 1: This recording does not constitute, nor should it be construed, 190 00:10:14,840 --> 00:10:18,720 Speaker 1: as investment advice, investment recommendations, or a recommendation as to 191 00:10:18,800 --> 00:10:21,640 Speaker 1: an investment or other strategy. Bloomberg ANIF should not be 192 00:10:21,679 --> 00:10:25,480 Speaker 1: considered as information sufficient upon which to base an investment decision. 193 00:10:25,559 --> 00:10:28,560 Speaker 1: Neither Bloomberg Finance LP Nor any of its affiliates makes 194 00:10:28,559 --> 00:10:32,319 Speaker 1: any representation or warranty as to the accuracy or completeness 195 00:10:32,320 --> 00:10:35,319 Speaker 1: of the information contained in this recording, and any liability 196 00:10:35,360 --> 00:10:38,040 Speaker 1: as a result of this recording is expressly disclaimed.