Energy Report 2023
Increasing use of green energy can reduce dependence on fossil fuels in Europe, leading to a potential decrease in energy prices.
Energy market trends and expectations Intro
Over the last two years, Europe has witnessed a staggering surge in energy prices. The escalation in energy costs can be attributed to a combination of various factors, most notably including low natural gas storage levels, economic recovery following COVID-19 lockdowns, reduced natural gas imports from Russia, and power generation being hampered by a prolonged drought.
Starting from the end of 2022, a significant consolidation occurred in the realm of energy prices, driven by the combined effects of various factors. In July 2023, prices plummeted to approximately 30 EUR/MWh, marking a mere one-fifth of the cost observed during a comparable period. Nonetheless, we foresee that the era of energy prices seen before the year 2021 will not yet make a comeback. (Please refer to Figure 1.)
This reality exerts a substantial influence on the real estate sector, given that the constructed landscape in the EU is responsible for roughly 40% of overall energy consumption and approximately 36% of total greenhouse gas emissions, as stated by the European Commission. The sector persists in confronting numerous challenges, including elevated energy expenses, energy security concerns, and the imperative to curtail carbon emissions. The shift towards sustainability and the incorporation of eco-friendly, energy-efficient methodologies will continue to hold paramount significance in the forthcoming years.
1. Main reasons of price consolidation
• Demand Reduction: In 2022, electricity consumption in the EU saw a remarkable decrease of 3.5%. Similarly, global gas consumption exhibited a decline of 1.5% in 2022, akin to the reductions observed during the COVID-related lockdowns in 2020. The worldwide reduction in demand was further
Rising energy prices have a significant impact on the real estate sector, as the built environment accounts for 40% of the total energy consumption.Figure 1. TTF gas prices evolution 2022-2023 (EUR/MWh)
bolstered by China’s “zero COVID” policy, which had a considerable impact on industrial production and energy usage within the nation. Nonetheless, notable risk factors loom for the year 2024, including heightened competition from Asia, particularly for liquefied natural gas (LNG), and the potential resurgence of demand.
• As per the IEA (International Energy Agency), the decline in demand within the gas market persisted through the initial quarter of 2023. This was attributed to more favorable weather conditions than anticipated and the successful implementation of substantial efficiency measures, which inherently led to a decrease in demand. (Please refer to Figure 2.) The data from the IEA reveals that gas consumption in Europe witnessed a remarkable drop of nearly 16%, equivalent to 55 billion cubic meters (bcm), throughout the 2022/23 heating season, marking a historically significant reduction.
• Increased LNG import to Europe: To compensate for the gas purchases from Russia, there was a significant increase in LNG imports in Europe. LNG became a baseload supply for Europe accounting for twothirds of imports during the 2022/23 heating season. Meanwhile, Europe’s net LNG imports rose by 8% (or 3.5 bcm) y-oy in Q1 2023 as the continent continued to offset declining Russian gas delivery.
• High Storage Capacity Utilization: In July 2023, European storage facilities attained a fill rate of 79.8%, surpassing the preceding 10-year average of merely 60%. The outlook in this regard is optimistic, with expectations pointing towards the possibility of further filling these capacities beyond this elevated level.
Estimated y-o-y change in gas demand by sector, OECD Europe, 2021/22 heating season vs 2022/23 heating season
Gas consumption in Europe decreased by nearly 16%, or 55 billion cubic meters (bcm), during the 2022/23 heating season.Figure 2. Mild Weather, energy saving measures and lower gas use in industry weighed on gas demand
2. Hungary price development
In Hungary, much like other countries in the CEE (Central and Eastern Europe) region, there were substantial price increases (gas +156%, electricity +38%) observed between the latter half of 2022 compared to the end of the first half. These increases were notable in terms of non-household consumer prices. By the conclusion of the second half of 2022, Hungary ranked second highest in the region in both gas and electricity prices. (Fig. 3-4.)
Starting from mid-2021 in Hungary, the conventional market dynamics did not operate as usual for electricity acquired from the open market. A unique pattern emerged where the more electricity a consumer aimed to purchase, the higher the per-unit cost became, leading to considerable supplementary expenses for larger consumers.
Examining the domestic electricity exchange prices for the current year, a trend of consolidation was evident, aligning with global patterns. In comparison to the rates at the close of 2022, domestic electricity exchange prices experienced a substantial reduction of 63% by June 2023. This suggests the potential for a corresponding decrease in consumer prices as well. (Refer to Figure 5.)
The consolidation of prices denominated in Hungarian forints is underpinned not only by the favorable trajectory of energy stock prices but also by the projected strengthening of the average exchange rate when compared to the previous year. Nevertheless, the exchange rate remains subject to various uncertainties, including the anticipated trajectory of the reference rate (with an expected further decrease), the progression of real yields, and the uncertainties tied to the influx of EU funds. Our current expectations point toward an average exchange rate of approximately 380 EUR/HUF for the year 2023. (Please refer to Figure 6.)
3. Expectations
• In the short to medium term, it is not anticipated that gas prices will revert to the levels observed prior to 2021, nor will the closely linked electricity prices witness a decline. The upcoming year could witness an escalation in prices due to multiple factors, including the acceleration of economic growth and a rise in energy consumption, particularly from China and other Asian nations. Additionally, the influence of an average or colder winter could contribute to upward price pressures.
• According to data sourced from the IEA, the demand for gas in Asia is projected to surge by nearly 3% in 2023, with China and India emerging as the primary catalysts for this expansion. Forecasts indicate that gas demand in China might undergo a growth of over 6% in 2023, driven by potentially heightened industrial gas consumption.
• The EU has reached a consensus on a voluntary reduction of natural gas demand by 15% until March 2024. Concurrently, the influx of record liquefied natural gas (LNG) shipments from the US, coupled with heightened supplies from Norway, Algeria, and Qatar, has played a role in mitigating the impact of reduced flows from Russia. These trends are expected to temper the pace of price escalation for the upcoming year.
• As per the IEA, European electricity demand is projected to remain stable until 2025, with an anticipated average EU demand growth of about 1.4% during the period of 2023-2025. (Please refer to Figure 7.)
• Within the power sector, the gradual phasing out of more than 50 GW of nuclear, coal, and lignite-fired power generation capacity creates additional market opportunities for gas-fired power plants. Nonetheless, this expansion is constrained by the rapid surge in renewable power generation, set to increase by nearly 30% over the medium term. This trajectory is reinforced by the EU’s agreement to ensure that, by 2030, the 27 member countries commit to sourcing 42.5% of their energy from renewable sources such as wind and solar power.
• On the other hand, Europe has been proactively diversifying its gas supply sources and lessening reliance on a sole provider, through endeavors to boost LNG imports and establish pipeline links. The augmentation of LNG production capabilities, exemplified by developments in the USA, lays the groundwork for a potential longterm decrease in gas prices, potentially dipping below the levels witnessed in 2021. This aligns with a gradual diminishing of dependence on Russian energy.
• The International Energy Agency (IEA) presents diverse medium-to-long-term electricity consumption forecasts across various regions. In China, the largest global electricity consumer (contributing to 31% of worldwide demand in 2022), an average yearly growth of 5.2% is anticipated for the 2023-2025 timeframe. India, on the other hand, is projected to experience an average annual growth of 5.6% during the same period. This follows a robust post-pandemic rebound, which supported substantial electricity demand growth of over 8.4% in 2022—a significant increase compared to the average annual growth rate of 5.3% observed from 2015 to 2019.
• In the United States, electricity demand marked a 2.6% rise in 2022, surpassing pre-Covid levels. However, a projected economic deceleration in 2023 is anticipated to lead to a contraction of approximately 0.6%, followed by a resurgence of 1.2% growth in 2024 and 1.3% growth in 2025. Meanwhile, in Africa, the outlook for the period 2023-2025 indicates notably stronger growth at an average rate of 4.1%. This upswing is attributed to a post-crisis economic revival propelling increased demand for electricity across the region.
Summary
• In the near term, particularly during the last quarter of 2023 and the initial quarter of 2024, energy consumption in Europe and the United States might witness an uptick concurrent with the gradual economic recovery,
potentially triggering price hikes. Furthermore, a looming global risk stems from the escalating energy usage in Asian and African nations, which could sustain energy prices above the current gas price level during the 2023/24 period.
• In the long run, the expanding adoption of green energy has the potential to diminish reliance on fossil fuels in Europe, potentially leading to reduced energy costs as renewable energy production continues its ascent. The progressive enlargement of power generation capacities grounded in renewable energy sources can also counteract the upward pressure caused by heightened global energy demand. The growth in LNG production and storage capacities can introduce price stability and aid in diversifying away from Russian natural gas, thereby mitigating speculative effects on market price fluctuations. On the whole, the proliferation of renewable energy sources and the rise in LNG gas imports may collectively facilitate a return to price levels reminiscent of those preceding 2020 in Europe. One of the prominent long-term concerns revolves around the mounting energy demand in non-European regions, particularly Asia and Africa; the precise impact of this trend remains challenging to gauge at present.
Kristóf Tóth Associate Director Head of Research | Hungary +36 20 859 0214Disclaimer
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Increasing use of green energy can reduce dependence on fossil fuels in Europe, leading to a potential decrease in energy prices.