The European energy market – and as a result, energy prices – have undergone significant changes in recent years. From the early 2010s to 2020, the energy market experienced remarkable price reductions. This affected both electricity (e.g. from an average of 5.60 Ct/KWh to 3.70 Ct/KWh in Germany) and natural gas (from 2.61 Ct/KWh to 1.13 Ct/KWh). The plastics industry has benefited from this in several ways. 

Gas can not only be used as a raw material for the production of elementary primary products, but also as a supplement to electricity as an energy source.

During this period, price trends in Europe were significantly influenced by the increased use of renewable energy. The expansion of the supply of primarily wind and solar energy helped reduce dependence on conventional energy. This trend has had a positive effect on costs, as renewable energies have become more competitive over the years. The shared political will in Europe to promote these sources should not be underestimated. 

This also gave rise to the “merit order”, a principle that determines how power generation units contribute to the grid based on variable costs. The cheapest units contribute to the grid first, followed by the more expensive ones, until demand is met – a model that originated in the 1990s from the liberalisation and deregulation of the electricity market in Europe. The aim is to minimise costs for consumers and at the same time expand “green” energy sources by prioritising the most cost-effective and environmentally friendly power generation units.

Other factors also influence energy prices: raw materials like oil, naphtha, hard coal, lignite, and natural gas, as well as the relationship between supply and demand, import and export conditions, exchange rates, and political decisions and instruments (e.g. carbon credits). These have led to a dynamic and always volatile price structure that presents companies with both challenges and opportunities.

Related: Gas demand to slow in mature markets – IEA 

A look at the structure of the German energy market illustrates the change. The installed capacity (output) of green energy has risen from around 35% at the beginning of the 2010s to just over 60% of the total today. The main role is played by wind, followed by solar, which account for approximately 90% of Germany’s renewable energy output. Of course, the distribution is different in every other European country. Water, for example, plays a much greater role in Switzerland than in Germany. The structures in France and the Benelux countries are also different.

Actual power generation, on the other hand, is lagging behind as it is primarily dependent on the weather. Here too, however, the proportion of electricity generated from renewable energy sources rose from around 35% to 50% between 2016 and 2020, although 2020 cannot be taken as a representative year due to the pandemic and accompanying lower demand. The aim of further increasing the share of renewables in the European market will help reduce prices in the long term. One can, however, argue about the level.

The price structure and volatility in the electricity market have changed since 2021. For instance, in the first half of 2021 compared with the first half of 2020, the electricity generated from wind was down a good 20% (15.2 TWh), while demand was higher by 6% (13.5 TWh). The supply shortfall led to a first noticeable wave of increases from an average of 3.75 Ct/KWh in 2020 to 6.25 Ct/KWh in the first half of 2021 – still a favourable level from today's perspective. In the second half of the year, events came thick and fast: gas shortages (supply disruptions), coal shortages (supply bottlenecks), an increase in coal prices and carbon credits, the prospect of a further reduction in supply due to the shutdown of nuclear power plants, and additional price hedging by market participants (increased artificial demand). This resulted in record-breaking highs in monthly prices (>20 Ct/KWh in December 2021) and the annual average (10.83 Ct/KWh).

Although the horrific year that was 2022 has already been reported on countless times, it should also be analysed in more detail to understand the background. Until the start of the war in Ukraine, the first two months of 2022 experienced a reduction of 50% from December 2021. The high in February/March was also almost completely absorbed two to three months later. A creeping development during June 2022 with the execution of maintenance on the main pipeline, as well as the massive increase in volume and price hedging transactions by European governments – primarily for gas – led to a toxic blend that saw historic all-time highs for electricity and gas at the end of August.

Related: War in Ukraine shifts global approach to energy dependence

With the gradual realisation that gas storage – as an indicator of the available supply – had already been around the average for a five-year period, with an upward trend throughout the year, as well as constantly increasing import volumes of LNG, primarily from the US, prices also fell abruptly from September 2022. As a result, the real market mechanisms (finally) kicked in again.

Since then, and to this day, prices have only travelled in one direction: downwards. At least for those few who have participated in market developments via spot models. This does not apply to the majority of market participants. All fixed prices that were agreed on in 2022 and were/are valid for 2023 and beyond are based on the 2022 market prices plus risk premiums of the suppliers. Prices of 20-30 Ct/KWh in the electricity sector and 10-15 Ct/KWh in the gas sector are not uncommon. In Germany, for example, even taking into account the price curbs (13.0 Ct/KWh for electricity and 7.0 Ct/KWh for gas), the actual spot prices in both energy segments are lower. Around 10.0 Ct/KWh for electricity and approximately 4.25 Ct/KWh for gas. These are differences of >50% compared to the fixed prices that were concluded in the crisis year of 2022. The uncertainty at that time has been frozen for the future.

Prices are expected to continue to fall in the future, albeit to a higher level than before the pandemic. This can also be seen in the traded futures, which showed a uniform picture even during the worst crisis on the market (2022). The further into the future, the lower the price. 

Despite all the challenges and dynamics, the European plastics industry (as part of the chemical industry) must still optimise energy consumption and adapt to the changing energy scene. The industry can only secure its long-term competitiveness by strategically adapting to energy developments and adjusting its own energy management via suppliers, prices, and contracts.

Plasteurope.com has decided to end the year on a slightly different note. Instead of taking you, dear reader, to another website with our picks of the year, we’ve decided to make things easier and brought everything under the common roof of the Plasteurope.com website and magazine. From the impact of the Ukraine War and Brexit to automotive, we’re bringing you an analysis of the year that was, with hints of what you could look forward to in 2024. Our goal, simple as always, is to help you make better business decisions. Hope you enjoy reading our Year-Enders 2023!