S&P Global Ratings has raised its base-case assumptions for power prices by more than 10% in five of Europe's main markets over 2022-2023 from its September 2021 assumptions.
(see "The Energy Transition And What It Means For European Power Prices And Producers: February 2022 Update," published today on RatingsDirect).
The main reason for this change is higher anticipated commodity and notably gas prices for at least the next 12-18 months.
This high global commodity price environment comes with an acceleration of anticipated closures of conventional generation plants--notably nuclear and coal--in the next three years as stringent decarbonization energy policies are implemented across Europe. At the same time, we believe the pace of commissioning new renewables projects and interconnections will be insufficient to offset the loss of conventional capacity.
"We believe solar and wind power will only gradually fill the gap, implying a tighter supply-demand balance over the next three years and greater use of gas in the meantime," said S&P Global Ratings credit analyst Massimo Schiavo. "As a result, we expect that the energy transition will not be smooth over this period, with a still-high dependency on volatile global gas prices," Mr. Schiavo added.
We have revised our forecasts for Title Transfer Facility (TTF) in 2022 to $20 per million Btu (/mmBtu) from our previous expectation of $12/mmBtu. We expect European TTF gas prices will remain volatile because of the Continent's declining production, more uncertain volumes of gas 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 flows, which are fundamentally exposed to global gas industry developments.
Beyond 2022, we expect power prices will remain relatively high, supported by demand-supply imbalances. Yet by 2023, we believe lower gas prices will likely lead to a slow decline in power prices--despite our expectations of sustainably high carbon prices. That said, power prices well above 2019 levels for the next three years should underpin earnings for merchant power generators, notably those who provide carbon-free baseload power, such as nuclear or hydro.
This report does not constitute a rating action.
