How weather conditions escalated the supply crunch – but helped save us in the end
2022 was by all accounts a year of extremes. The invasion of Ukraine and subsequent European sanctions ignited fears of a looming supply crisis. As we saw deliveries of natural gas go down and energy prices go up, the weather became more important than ever. Weather conditions like heat, cold, wind and precipitation affect both the production and consumption of energy. And when we see extreme weather conditions like heat waves and drought, the impact on energy markets can be equally extreme.
A summer of records
In the first half of the year, market volatility was mainly driven by political unrest and concerns about whether there would be enough gas in European storages to get us through winter. While the winter was the cause of our concern, the summer was what initially challenged energy markets with extreme weather conditions, further escalating the nascent supply crunch in Europe.
The heat came and it came early. Warm weather usually enters the mix in August, but in 2022, temperatures started rising in June. And after that, the records started coming in. In July, the UK recorded its hottest day ever at 40.3 degrees Celsius on 20 July. It was also the driest July in 87 years. Across Europe, temperatures were between 1.5 and 2 degrees warmer than average. The warm and dry weather meant a decrease in the production of hydro energy and low river levels across Europe, which were a challenge for the production of nuclear energy, as cooling nuclear reactors proved difficult. In France, we even saw the maximum temperature of cooling water raised from 28 degrees to 31 degrees to keep nuclear plants up and running. By the end of the summer, the extreme weather conditions had intensified the supply crunch, causing the day-ahead power price to spike on 26 August at 699 EUR/MWh – the highest price recorded in 2022.
The winter that never came
As energy prices peaked, so too did concerns of a cold winter. But the cold never came. With the exception of the Netherlands, no country in Europe recorded a temperature average that was colder than usual. The usual average temperate for winter is 3.6 degrees, and in 2022 the average temperature across Europe came in at 3.8 degrees, meaning we saw a milder winter than expected.
Together with high price levels, the mild weather conditions resulted in the necessary demand reduction that ultimately ensured we had enough gas to see us through.
Going forward, the weather will remain a determining factor in energy trading
Energy trading companies like Danske Commodities need to excel at weather forecasting and analysis. Because the weather affects energy production and consumption, we as energy traders need weather analyses to position us correctly in the market on both the short term and the long term.
The impact of the weather was more evident than ever in 2022. Over the course of the year, we saw the weather turn from villain – as a warm and dry summer escalated the energy crunch – to hero, as a mild winter helped ensure gas supplies were sufficient. And given the influx of renewable energy expected in the coming years, the weather will remain a determining factor in energy trading.
About Kim Bentzen
- Position: Head of Meteorology
- Employed since: September 2013
- Educational background: BSc. Meteorology