Highlights from our Market Expert View Winter Edition

Carbon prices impacted by rising gas prices 

The importance of fuel prices for carbon price development has, like so many times over the last twenty years, proven important lately. The strongly rising gas prices lately have the potential to increase coal’s share relative to gas in thermal power generation.  

However, apart from that, many factors are pointing in a somewhat bearish direction. Major carbon and power intensive sectors are facing headwinds, affecting power demand and industrial emissions. This occurs while renewables are performing well, reducing dependency on thermal power.  

Emissions have been on a strongly falling trend in the last years, and with scheduled auctions providing decent supply, available allowances from auctions and free allocation are exceeding emissions. As a result, we expect that a CO2 price increase throughout the year is unlikely.   

Gas risks remain 

European gas prices increased a lot at the end of last year in anticipation of the sudden loss of Ukraine transit volumes. Since spring 2024, the TTF day-ahead contract has doubled from less than €25/MWh to almost €50/MWh. 

However, markets have adjusted to this new reality, and going forward prices could decrease slightly as winter weather risks gradually evaporate. Additionally, more LNG can be expected as global supply ramps up this year, with high prices ensuring that Europe remains competitive in the global market. Storage levels are fairly healthy (although significantly down from the exceptional levels seen in the last two years). However, the question remains of how storage will be filled ahead of next winter, given the negative summer/winter spread and lacking price incentives. Forced buying by TSOs may again be necessary. Geopolitical, sanction-related, and infrastructure risks also remain a concern.  

Expectations for weather and hydropower in continental Europe 

2024 was yet another year characterised by extremes in weather for continental Europe. Multiple heat waves during summer caused consumption spikes and power outages in the Balkans, while heavy rains during autumn caused flooding, especially in Spain and central Europe. 

The high precipitation levels during autumn resulted in healthy hydro reservoir levels at the start of 2025, especially in Iberia and Southeastern Europe, and run-of-river production remained at normal or above normal levels across most of central Europe. Parts of Southern Europe are currently under drought alerts, particularly in Iberia, which has experienced drier-than-normal conditions in recent months. Snow conditions in the Alps are at normal levels or slightly below. 

Considering seasonal weather forecasts for the rest of winter and spring, higher-than-normal temperatures are expected for all of Europe. Drier-than-normal conditions are expected in southernmost Europe, while central regions should see normal levels. Our expectations for the coming months are hydro reservoir levels and snow levels slightly below normal for Alpine countries, while reservoir levels in Iberia and Southeastern Europe should remain above normal. 

German power market: volatility is here to stay 

Germany remains in a recession for the second consecutive year, with economic growth expected to be minimal (0,2-0,4%). Weak industrial performance was one reason why power consumption remained at a historically low level. In the production mix, power imports have become more profitable for Germany instead of running expensive coal and lignite plants. Germany remained a net power importer also in 2024. 

The German power market experienced significant price volatility, driven by the rapid expansion of solar capacity and a lack of flexibility in the power system. Instances of high- and low-priced hours increased. Driven by high gas prices we expect German power prices to increase year-on-year. Price volatility remains and demand could grow moderately, driven by higher electrification. Elections in February will play an important role in the German energy politics and strategies for the future. 

UK to stay premium power market  

Although average day-ahead prices eased in 2024, and intraday spreads narrowed, the market showed the tendency for spikes and it’s likely we’ll see a continuation of this trend through the coming year. Our modelling shows prices will remain above continental and Nordic markets this year, leaving the UK as predominantly a net importer.  

As in July and August 2024, strong wind power output can lead to a flow reversal with UK producers able to export surplus production. One consequence is that unplanned cable outages can lead to more price spikes although this creates big trading opportunities for sources of flexibility. The increasing share of renewable generation is continually squeezing gas-fired plants out of the mix, the main balancing element in the power stack following the closure of the last coal power plant in October. High renewable expectations mean power futures are currently priced above the short-run marginal cost of gas, and we expect this decoupling trend to continue.  

On the power consumption side, we forecast a slight increase of 3% from last year’s levels amid the commissioning of more utility-scale batteries, electrification and the growth of EVs among other factors.   

The new Testo Integrato del Dispacciamento Elettrico (TIDE) in Italy 

The Italian power market adopted a new regulation called TIDE (Testo Integrato per il Dispacciamento Elettrico), which was published by ARERA on January 1st, 2025.  

The goals of TIDE are to promote a more efficient usage of available resources in the system, in alignment with the environmental objectives of decarbonisation promoting liquid and fair energy and balancing markets, ensuring neutrality, impartiality, and transparency. In addition, TIDE aims to complete the harmonisation of the Italian power markets with other European markets step by step.  

In the long run, the new regulation will allow the aggregation of flexible assets at zonal and nodal levels. 

For the ancillary services, the definitions of primary, secondary, and tertiary reserves will be harmonised with those used in the rest of Europe, and by 2028, the primary reserve (Frequency Containment Reserve, FCR) will be entirely auctioned with a market mechanism. 

From January 1st, 15-minute granularity is the new Minimum Trading Unit (MTU) in the intraday auctions (IDAs) and continuous trading (XBID) and for the Imbalance Settlement Period: the spot auction of the Day Ahead is expected to have 15-minute granularity as soon as the whole Single Day Ahead Coupling (SDAC) will adopt it (expected: June 2025). 

Finally, from January 1st, the so-called Prezzo Unico Nazionale (PUN) formerly calculated with an iterative process via the Euphemia algorithm, was substituted by the new PUN Index GME, which is calculated ex-post, after the delivery of the spot exchange. 

The above changes were introduced on January 1st, and we can expect other changes to come in the following months and years under the TIDE umbrella.   

Extreme power surplus in the Nordic area this year 

The year 2024 saw low wind and high temperatures, and we might expect higher consumption and more wind if the weather normalises in 2025. In addition to that, we anticipate potential growth in consumption in many areas, such as data centres, EVs, heat pumps, and the electrification of the oil sector.  On the production side, we have already seen a strong increase in wind and solar installations in the past 12 months, and at the beginning of the year, we already have more than 15TWh surplus in hydro resources from both snow and hydro reservoirs.  

Adding this up, we see a strong increase of 50% from 40TWh in 2024 to more than 60TWh in the Nordic surplus, which needs to be exported in 2025. This becomes extreme when you look at the Northern areas of Norway and Sweden, separated from the rest. In 2025, with normal weather conditions, the surplus in this area could reach 60TWh, and by adding the 15TWh surplus in the hydro system, we reach 75TWh, which needs to be exported, or some of it might be lost. We need a highway southwards, and the Southern areas of Norway/Sweden/Denmark need to act as a transit route for exporting power out of the Nordic region this year. 

Nordic price outlook 

In the Nordics there is currently a strong hydrology concentrated in the North. This leads to a low price outlook for the Northern price areas for the rest of the year. For the Southern areas and the system price, we still see some upside potential, but with a high level of uncertainty. Since the go-live of flow-based market coupling, commercial border flows from north to south in the Nordics have increased, but not sufficiently to alleviate the low prices.