July Heat Wave Threat to Keep European Power Prices Elevated

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(Bloomberg) — The risk of more heat waves this month is keeping European power prices elevated after June’s record temperatures pushed costs to their highest levels since the 2022 energy crisis.

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Power prices surged as record temperatures swept across Europe, boosting demand for cooling while constraining supply. The episode highlighted how increasingly extreme heat linked to climate change can disrupt electricity markets in multiple ways, a pattern seen around the world.

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Forecasts show an elevated risk of further heat waves across the UK, Spain, Germany and France this month. The next spell of hot weather, while not expected to match June’s extremes, could meet the UK’s heat-wave threshold as early as this weekend, said the Met Office.

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Temperatures across much of Europe are forecast to run 2C to 8C above seasonal norms, according to Vaisala meteorologist Matthew Dross. By mid-month, France could again become the epicenter of extreme heat as high pressure, unusually warm seas and soils dried out by previous heat waves reinforce one another, he said.

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German next-month futures rose 2.2% on Thursday to trade at €103.58 a megawatt-hour on Epex. That’s just shy of June’s peak and near the highest since January. 

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The June heat wave tightened electricity supply by reducing wind generation, curbing nuclear output in France and Switzerland because of warm cooling water, and limiting the availability of some gas-fired plants. It also drove up electricity demand for cooling.

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Last month, average day-ahead power prices in Germany and the UK climbed to €109.50 and €115.76 per megawatt-hour, respectively. That’s their highest June level since 2022, according to Epex Spot SE. French prices reached their highest level since 2023.

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“Another heat wave could put the power system under similar strain, with weak wind generation and constraints on France’s nuclear fleet,” said Nathalie Gerl, lead power analyst at the London Stock Exchange Group.

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Markets are also watching for a repeat of the sharp price spikes seen during the June heat wave. During that period, individual hourly prices reached as high as €665.82 per megawatt-hour in Germany and €313.36 in France, according to Epex Spot SE.

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Even so, underlying supply conditions were not exceptionally tight, Gerl said. Instead, power producers repeatedly submitted evening offers well above their estimated marginal costs. The reason for this was that they also had to account for the risk that generating units would fail to start on time or lose efficiency in extreme heat, increasing the chance of having to buy replacement power at short notice.

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“The elevated evening power bids seen during the last heat wave could reappear under similar conditions,” she said.

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