Written by: Basant El-Farmawy
The French electricity market has witnessed radical transformations in recent months, as futures contracts for delivery in 2027 rose significantly, approaching the barrier of 110 euros per megawatt-hour, compared to low levels recorded at the beginning of this year when they dropped below 50 euros per megawatt-hour.
Factors behind the rise in electricity prices
The rapid wave of increases witnessed in the markets since the summer is due to several intertwined main factors. At the forefront is the significant rise in natural gas prices in European markets, alongside ongoing geopolitical tensions and concerns related to liquefied natural gas supplies and securing inventories in preparation for the winter season.
Tensions in some vital waterways have also contributed to increasing pressures on global energy flows, while intense competition between Europe and Asia over available gas shipments plays an additional role in raising the operational costs of generation plants that rely on fossil fuels to meet marginal demand.
Local and nuclear production challenges
Alongside factors related to global gas markets, the French market has been affected by domestic pressures represented by ongoing droughts that have cast a negative shadow on hydroelectric power production prospects. At the same time, levels of nuclear capacity availability raise noticeable questions ahead of the peak winter consumption period, as nuclear operation rates have registered a decline compared to the same period last year.
These challenges related to the system's ability to meet high demand during the cold months are quickly reflected in the risk premium in futures contracts. Added to this is the rise in prices of European carbon emission allowances, which increases the cost of operating backup fossil-fuel generation plants.
Market expectations for coming years
Data and market curves show that the wave of high prices is concentrated mainly on 2027, while contracts for subsequent years record significantly lower levels. Expectations indicate that delivery contracts for 2028 and 2029 remain clearly lower compared to the 2027 peak, reflecting expectations of the dissipation of current tensions in the medium term and the return of relative stability to European markets.
