« Unjustified concern about supply is needlessly inflating gas prices »

In an interview given in early December to the "Tages-Anzeiger", Christoph Brand, chief executive officer of the Axpo group, warned Switzerland about the serious risk of energy shortages during the winter.

To support his remarks, the director mentioned the case of November 6, 2024, a day described as a "dark lull", that is to say without sun or wind to feed the photovoltaic panels and the wind turbines. "While all of Germany's power plants were operating at full capacity and the import lines were saturated, demand was just barely met. Imagine if that had happened on a cold winter day: the lights would have gone out," he said.

At a time when the Federal Council seems ready to reopen the door to nuclear power in Switzerland, with its recent counter-proposal aimed at amending the Nuclear Energy Act, the country's energy future is at the center of concerns. But long before any nuclear revival, gas appears to be collecting the majority of votes.

During this month of January, we will turn our attention to the reemergence of this energy source in people's minds. Today, we focus specifically on the price of gas and its outlook, with the help of Norbert Ruecker, head of research Economics & Next Generation at Julius Baer.

Gas prices keep rising — what are the main reasons for this increase?

Supply concerns have increased for various reasons. First, because of the halt of Russian gas transit via Ukraine, but also because of the prospect of colder temperatures this week. It should be emphasized that these concerns are fueled by fluctuations in the perception of the underlying trends and the market mood. A certain anxiety persists regarding energy supply in Europe, despite market fundamentals that remain solid. This particularly anxious, or bullish depending on the point of view, climate contributes to artificially supporting prices.

What impact should consumers expect on their (already high) electricity bills?

In Switzerland, household tariffs are protected against these temporary increases, because electricity prices are fixed for one year. On the other hand, companies operating on the liberalized market could suffer temporary increases, depending on the terms of their contract, notably if their tariffs are dynamically indexed to spot electricity prices.

That said, although short-term electricity prices have risen, long-term annual electricity contracts have not moved much. This decoupling is simply explained: electricity prices are more volatile than gas prices. In recent months, several episodes of strong wind production have led to electricity prices traded well below levels determined by the cost of gas.

Liquefied natural gas (LNG) imports into Europe largely depend on its ability to offer competitive prices. Currently, at levels above 40 euros, competition with Asian buyers eases.

What can be expected in the coming months? Is gas definitively doomed to see its price rise?

On the contrary, we anticipate a significant drop in natural gas prices in Europe, for various reasons. Stocks are amply sufficient, and the much-discussed tightening took place in November, rather than in recent weeks. Moreover, storage levels are within the ten-year average.

Liquefied natural gas (LNG) imports into Europe largely depend on its ability to offer competitive prices. Currently, at levels above 40 euros, competition with Asian buyers eases. China prefers domestic coal and gas, which are cheaper, and other Asian buyers remain absent due to financial constraints. Consequently, cargoes turn back and shipments to Europe resume. In addition, the Asian winter has been relatively mild, which, together with the weakness of the Chinese economy and the restart of Japanese nuclear power plants, further dampens regional energy demand.

Finally, the expansion of LNG supply is accelerating. Two new terminals in the United States are now operational and have shipped their first cargoes to Europe. A terminal in Canada is expected to follow suit during the summer. These trends indicate that Europe's supplies should remain abundant and prices will eventually fall.

Would Europe (and Switzerland) need more storage capacity to reduce this upward pressure on prices?

Europe has sufficient storage capacity, especially as demand is structurally declining. As mentioned earlier, it is an unjustified concern about supply that unnecessarily inflates gas prices. Europe remains in a way stuck in crisis mode and has still not undertaken a proper review and debate on the policies implemented to respond to the energy crisis.

For example, some experts, including ours, argue that the targets set by the storage program caused an increase, rather than a decrease, in prices as the winter heating season approached. It was the forces of the market, and not policy measures, that guaranteed the resilience of energy supply in Europe in 2022.

Otherwise, what solutions could be considered to ease the market?

Trust in the markets and calm are insufficient. Tomorrow's energy markets need flexibility and support, qualities that gas storage and power plants can offer. That said, Switzerland has a hydroelectric storage system that offers the same qualities. Pragmatically, it can also rely on gas storage capacities in France and, more broadly, in Europe.

Out of pure dogmatism, we could consider building our own domestic storage infrastructure. However, that would entail significant costs and increase the economic burden. The energy transition must remain affordable, otherwise it is doomed to fail. That is the lesson that can be drawn from recent years.

What about renewable energies? Their instability seems very problematic in the image of that day referred to as « dark doldrums » that occurred in December?

The energy transition indeed causes much more pronounced fluctuations in electricity prices, in both directions. These prices oscillate between the costs of gaseous fuels (associated with dispatchable capacity) and prolonged periods of renewable energy abundance, characterized by almost zero marginal costs. This phenomenon is well understood in Europe and is increasingly appearing in the United States.

Periods of "dark doldrums" (low wind and solar production, editor's note) tend to last days rather than weeks and are generally followed by their opposite: periods of abundant wind generation. Price spikes are often followed by sharp drops. In 2024, Germany recorded a record number of hours with negative electricity prices. This variability represents a major challenge, notably for grid operators. However, solutions aimed at mitigating these fluctuations are already being implemented.

Periods of "dark doldrums" (low wind and solar production, editor's note) tend to last days rather than weeks and are generally followed by their opposite: periods of abundant wind generation.

What is the means?

Investments in battery storage are booming. Utilities increasingly offer dynamic and flexible tariffs. Capacities, whether batteries or demand shifting such as heat pumps or electric vehicle charging, allow peak loads to be shifted to off-peak hours, thereby considerably mitigating the difficulties related to variability.

The continued expansion of the electricity grid also facilitates the integration of renewables and allows greater flexibility. However, what is missing is a proper debate on grid tariffs. With households and businesses becoming producers and consumers, the current model of energy-based grid tariffs is outdated.

Instead, grid tariffs could be capacity-based, like the internet. Such a model would encourage the necessary flexibility, reduce the need for grid expansion and establish a fairer sharing of costs among users. Unfortunately, our political discussions remain stuck in an old world, centered on subsidies and questioning markets.

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