Russia Sanctions To Drive European Power Prices To Their Highest Increase In 10 Months

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Russia power generation
High-voltage lines, from Russia's largest Sayano-Shushenskaya hydroelectric power station, are seen outside the town of Sayanogorsk, in the Siberian Khakassia region, south of Russia's Siberian city of Krasnoyarsk, on July 28, 2014.

European power prices are headed for their highest increase since September based on concerns that fresh sanctions imposed by the European Union against Russia could increase the cost of production for local utilities.

Europe’s benchmark for power prices, the German 2015 contract, rose nearly 2.2 percent, while the French benchmark saw a 1.3 percent rise, and Nordic prices spiked 4.4 percent in the past 10 months, according to data compiled by Bloomberg. A fresh round of sanctions imposed against Russia by the EU, which imported 46 percent of its gas and 31 percent of its coal requirements from Russia in 2013, have triggered concerns about supply disruptions even though Russia’s gas and coal sectors were not targeted by the EU sanctions.

“Traders bought in expectation of drastic sanctions against Russia and the potential impact on supply of gas and coal to Europe,” Nicolai Wuesten, a power market analyst at Energieunion GmbH, said, according to Bloomberg, adding: “The market is nervous, because we are depending on Russian commodities.”

Germany’s power prices increased to 36.15 euros ($48.82) on July 29, its steepest jump in more than four months. Coal for delivery was at a seven-week high of $80.50 for a metric ton but closed at $78.80 on Wednesday, Bloomberg reported.

“When sanctions were decided, the contract started falling again,” Wuesten said, according to Bloomberg, and, referring to the German contract for the next year, added: “Traders were buying the rumor and selling the fact. The Cal 15 has room to drop to 33.50 euros ($44.85) a megawatt-hour by the end of this year if we see a mild winter.”

However, Barbara Lambrecht, a Frankfurt-based analyst at Commerzbank AG (OTCMKTS:CRZBY), said, according to Bloomberg, that rise in coal prices is not likely to be sustained because of the growing demand for renewable energy and because the country's energy-hungry industries are witnessing slow growth.

“The current price recovery is quickly likely to run out of steam,” Lambrecht said, according to Bloomberg. Commerzbank predicts that the German 2015 contract will be priced at an average of 36 euros ($48.23) while trading on the European Energy Exchange AG.

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