European Winter Electricity Prices Reach Highest Premium Since 2022 Crisis
Drivers and Risks Behind Surging European Winter Power Prices
By Forrest Crellin and Nora Buli
PARIS/OSLO, May 26 (Reuters) - European winter electricity contracts are trading at an over 20% premium to next year's benchmark, data shows, the highest since the 2022 energy crisis as low gas stocks and shrinking hydropower reserves raise the risk of even higher energy costs for businesses and households.
Since the U.S.-Israeli war on Iran started in late February, shipping through the Strait of Hormuz, a key waterway for global energy flows, has been largely at a standstill. The disruption in energy supply has pushed up wholesale energy prices.
In Germany and Italy, the two European power markets most reliant on gas-fired generation, winter baseload contracts are trading above €110 per megawatt hour (MWh) and €120/MWh respectively, more than a fifth above the year-ahead 2027 price of around €92/MWh and €104/MWh, LSEG data shows.
The steep premium - a backwardation market structure where near-term contracts cost more than later-dated ones — signals acute concern about winter supply.
Gas Market Pressures
Hormuz Squeeze and LNG Supply
GAS: HORMUZ SQUEEZE
The concerns centre on the gas market. Iran has largely blocked liquefied natural gas shipments through the Strait of Hormuz in retaliation for the U.S. and Israeli strikes, removing about a fifth of global LNG supply and intensifying competition between Europe and Asia for flexible cargoes.
That has made it harder for Europe to rebuild storage before winter. Gas inventories are at about 38.2% of capacity, well below the typical seasonal level of roughly 52% and far from the European Union's 90% target by November 1, data from Gas Infrastructure Europe shows. With about 160 days until the EU deadline, injection rates would need to nearly double to meet the goal.
Storage and Security of Supply
Storage levels are lower than at the same point in 2022, when Europe scrambled for alternatives to Russian pipeline gas following Moscow's full-scale invasion of Ukraine.
Companies including Norway's Equinor have warned of a security of supply risk. Equinor executives said this month that Europe could face a critical gas shortage if the Hormuz disruption lasts one to three more months.
European power prices could rise further if the strait remains blocked this summer, gas storage stays tight and the current water deficit persists, BNP Paribas analyst Jason Ying said. Gas prices, currently around €46/MWh on the Dutch TTF hub, are not yet pricing in a winter premium, he added.
Weather Uncertainty
Weather adds another layer of uncertainty. Forecasters expect an El Niño weather pattern this year, which could bring a milder European winter, easing heating demand — but also a hotter, drier summer that would worsen hydropower generation.
Hydropower Constraints
A Decade Low in Reservoirs
HYDRO: A DECADE LOW
Hydropower generation is already strained. Low snowfall last winter is set to limit reservoir refills over the summer, and the combined hydrological balance for continental Europe and the Nordics — a measure of available generation capacity held in reservoirs, snow and soil — is at its lowest in a decade, LSEG data shows.
Impacts on Power Markets
Nordic and Alpine countries rely on flexible hydropower to meet peak winter demand and to balance the grid when gas prices spike or renewable output falls. During the 2022 gas crisis, hydropower constraints amplified stress across the European energy system, and traders said low reservoirs could have a similar effect this year.
Italy, dependent on both gas and hydropower, is the most exposed to future price spikes. Germany also faces pressure from gas costs and weaker imports from hydro-reliant Alpine and Nordic neighbours, said Evan Kyritsis, an analyst at Swiss energy firm Axpo.
"The buffers that would normally be in place — namely full Alpine reservoirs, ample Nordic hydro, and comfortable LNG availability — are absent this year," he said.
Further gas price spikes or a prolonged Hormuz closure would hit front-year contracts in gas-dependent markets hardest, as those prices directly reflect higher fuel costs, a power trader who declined to be named said.
(Reporting by Forrest Crellin in Paris and Nora Buli in Oslo; Editing by Nina Chestney and Emelia Sithole-Matarise)
