Political Turmoil In France Could Worsen Europe’s Energy Problems

Authored by Tsvetana Paraskova via OilPrice.com,

• Political instability in France, Europe’s top electricity exporter, raises concerns about reduced power exports and exacerbates the energy crisis.

• Rising natural gas prices and depleting storage threaten European industry competitiveness this winter, potentially leading to production cuts.

• Europe’s energy woes highlight the continent’s vulnerability in the global energy market, particularly with the looming end of Russian gas supplies.

Europe’s natural gas and power prices are rallying again as the proper heating season begins, adding to concerns that a new energy crisis is brewing.

The political turmoil in the top European electricity exporter and second-largest economy, France, certainly is not helping.

A prolonged government crisis after the ousting of Prime Minister Michel Barnier last week could result in reduced electricity exports from France to its interconnected markets, including Germany and Italy, Reuters market analyst Gavin Maguire argues.

This would be another layer of energy shock for European markets, which have been grappling with rising electricity and natural gas prices in recent weeks.

The rising budget deficit and the possibility of a no budget for 2025 could lead to politicians in France looking to curb the high French electricity exports, according to Reuters’s Maguire.

Considering that France is Europe’s top exporter of electricity, this would have repercussions on the power markets and prices across Europe.

With the fall of the government, any improvement of France’s public finances will now be postponed until a new government is formed, ING analysts said last week.

As a state-owned firm, France’s electricity giant EDF has contributed to the country’s piling public debt.

But EDF’s large nuclear reactor fleet that provides around 70% of France’s power and the rebound in hydropower generation have allowed France to boost its electricity exports this year. 

“Buoyed by strong nuclear and hydroelectric output, France has exported record amounts of electricity to neighboring countries this year, despite limitations on eastern interconnections that restricted exports in the spring,” energy firm Engie said in its semi-annual briefing on the European energy market in September.

Electricity demand in France remains below 2020 levels, partly due to a loss of industrial output and competitiveness and consumer energy-saving efforts, Engie said, noting that demand has rebounded more quickly in Germany, the UK, Belgium, and the Netherlands.

France’s net exports of electricity are set to hit a record high in 2024, data from French grid operator RTE shows. That’s because maintenance on many nuclear reactors has been completed, and hydropower generation has rebounded. 

There is no imminent threat to France’s huge power exports. Yet, the political instability in Europe’s largest net electricity exporter makes the European power markets even more nervous. 

Europe’s industry is set to lose further competitiveness as high energy prices, rising natural gas prices, and concerns about gas supply this winter are increasing uncertainty about factory utilization amid rising costs.

European benchmark natural gas prices are hovering around a one-year high hit last month as cold snaps in November dashed hopes and prayers of a third relatively mild winter in a row.

In recent weeks, Europe has been depleting its natural gas stocks at the fastest pace since 2016 as demand has increased with the colder temperatures.

This adds to the looming end of Russian pipeline gas supply to Europe via Ukraine after December 31 and growing competition for spot LNG supply with Asia for winter demand.

This winter could inflict more pain on industries relying on natural gas and force curtailments in production, analysts and industry executives have told Reuters.

The much higher energy costs in Europe are putting its industries at a disadvantage compared to the U.S., Asia, or the Middle East.

For example, the current Dutch hub price is almost five times higher than the benchmark U.S. natural gas price at Henry Hub.

The highest spot-based electricity prices in Europe since February 2023 threaten industrial production in key economies and loom large over business sentiment.

Amid rising energy prices and fast-depleting natural gas inventories, European energy markets are more anxious than usual as the governments of the two biggest economies, Germany and France, have now collapsed.