2024 Energy Outlook- Five key drivers shaping the energy markets this year

By Trading and Risk Manager, Richard King.

Looking ahead to 2024, Richard outlines the five key drivers that are expected to shape energy markets throughout the year.

The price evolution of energy contracts continued its rollercoaster ride through 2023, although to the relief of businesses across the country the overall trend proved to be distinctly bearish, with contract prices closing the year at levels not seen since January 2022 before the Russian invasion of Ukraine.

Such has been the success of European economies in weaning themselves off Russian energy imports that much of the geopolitically derived risk premiums have now dissipated from the market, with the result that traditional market fundamentals are once again driving prices.

So as we settle into a new year, what are the drivers that will likely influence the market direction in 2024?

1. Gas storage and global market dynamics

The current downtrend we saw in the final months of 2023 has been driven mainly by high EU gas storage levels combining with mild temperatures and plentiful LNG imports, helping to reassure markets that Europe will be able to cope with minimal pipeline imports from Russia. Consequently, risk premiums are quicky falling out of contract values.

If the weather remains mild in the first quarter of 2024, the lack of significant storage withdrawals will continue to pressure prices as high gas inventories will require less restocking through the summer of 2024, and, in turn, increases the chances of reaching similarly high levels before the onset of next year’s winter heating period.

Overall, European storage capacity could also increase further through 2024 as gas shippers may look to utilise Ukraine’s extensive storage infrastructure. The UK’s storage position is much stronger than it was 12 months ago, with the return of some capacity at Centrica’s long range storage facility at Rough. It should be remembered though that overall storage capacity in the UK remains well below the levels of our European neighbours, with only two weeks of supplies available to cover demand over a typical winter as the UK has traditionally relied on its own supplies from the North Sea.

The fact that Europe entered the winter period with gas inventories at over 98% capacity is a testament to the robust supplies of natural gas exported from the Norwegian sector of the North Sea. This was following a period of heavy maintenance this summer on top of efforts by European countries to increase LNG import infrastructure by commissioning new FRSUs (Floating Storage and Regasification Units), which offer a faster and cheaper alternative to land-based terminals and have helped to improve supply capacity.

The ability to import more LNG supplies will only drive prices lower if the gas is available. Indeed, the additional reliance on LNG to provide Europe’s gas needs places the Continent at the end of a long global supply chain that leaves it susceptible to short term supply shocks such as during the Australian offshore workers industrial action in the summer.

However, as it stands Europe is well placed to receive good volumes of LNG tanker deliveries through the early part of the year.  Asian demand is relatively muted with evidence of slowing economic growth across China. There are also logistical issues with American exporters facing delays to transit the Panama Canal due to drought conditions adversely affecting water levels in the region, meaning the shorter shipping time to European markets is more attractive.

Long term prospects for LNG supplies also remain strong for the next few years, with the forecast expansion of LNG liquefaction capacity from major exporters such as Qatar and the USA through the middle part of the decade offsetting declines in European domestic gas production from the North Sea and possible EU sanctions on Russia’s Artic 2 LNG terminal.

2. Improvements in nuclear infrastructure

Another bearish influence on European energy prices in 2024 will be the expected improvement in nuclear generation from the French nuclear fleet compared to the recent past, with EdF announcing an increased forecast for annual generation of between 315 – 345 TWh for 2024, up from its 300 – 330 TWh forecast for 2023. This follows an extensive maintenance programme over the past 18 months to fix stress corrosion issues at a number of reactors as well as the completion of delayed reactor maintenance as an after-effect of Covid-19 restrictions during 2020-2021.

The improvement in French nuclear capacity is of vital importance to electricity grids across Northwest Europe as much of the surplus energy is exported to neighbouring countries, including to the UK via subsea interconnectors. There is currently an outage on the IFA 2 linking the UK and France until February which may potentially increase peak prices for the start of the year, although this could be offset by the operational go-live of the new 1.4GW Viking Link interconnector to Denmark from January.

3. Increased renewable generation

We can also expect downward pressure on prices from increased renewable generation during 2024 with the commissioning of the initial phase of the world’s largest offshore wind farm at Dogger Bank whose turbines will produce 6 TWh of clean electricity per year or the equivalent of 2% of the UK’s annual demand.

The high wholesale power prices of the past couple of years have also ignited renewed interest in solar PV, from developers looking at multi-megawatt projects to businesses and homeowners looking to offset high energy costs with onsite generation. Forecasts indicate the UK will install over 4 GW of PV capacity in 2024 with total installed capacity set to grow by more than 60% by 2025 as falling panel prices and high electricity bills make it economically viable to install solar PV even without government subsidies. This additional supply generation should help to push down overall electricity prices, although the intermittent nature of renewable energy may see market volatility increase, especially with the planned closure in September of the UK’s last remaining coal-fired power station at Ratcliffe.

4. Economic slowdown impacting on energy demand

On the other side of the pricing equation, energy demand continues to be weak with evidence of a 10-15% fall in consumption from pre-Covid levels due to increased energy efficiency measures, industrial demand destruction and sluggish economic growth prospects with the higher interest rates needed to curb inflation stifling business investment and consumer spending.

UK economic growth is set to remain poor in 2024 as Bank of England has just recently indicated no room to cut interest rates from current level of 5.25% as it prioritises the fight against inflation rather than promoting growth. Through the medium term we could start to see electricity demand starting to grow however, as the rapid uptake of electric vehicles increases and the market for domestic heat pumps expands.

5. Political upheaval

Outside of these events, we can expect further possible upheaval within the energy industry during 2024 with political developments on both sides of the Atlantic. A UK General Election is due by the end of the year, with most political commentors expecting Britain to go to the polls in the autumn.  Given the contrasting visions set out for the country’s energy system at the recent Conservative and Labour party conferences, the outcome will have major consequences for the future operation and design of the power and gas grids as the country aims for its goal of a Net Zero economy by 2050.

There will also be the political drama of a presidential election in the US, again pitting two sides with very different ideas of achieving energy security against each other. A Republican victory promises further expansion of fossil fuel exploration and a potential watering down of the current administration’s signature Inflation Reduction Act, whereas a Democratic victory would likely see further emphasis placed on the role of renewables and higher ambitions for the decarbonisation of the world’s largest economy.

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