Grid Constraints in France Impacting European Power Market Dynamics

Key Takeaway

• France's grid limitations are causing power export constraints to neighboring countries, leading to higher wholesale prices across Europe.
• Italy and other nations face increased costs as they turn to more expensive energy sources, with German day-ahead prices €40 higher than France's.
• Scope Ratings highlights fiscal pressures in euro-area countries like France and Belgium, affecting sovereign ratings amid rising debt trajectories.

Grid Constraints Affect Power Exports

France is currently experiencing grid limitations that are impacting its ability to export power to neighboring countries such as Belgium, Germany, Switzerland, and Italy. The French power-grid operator RTE has reported that the capacity for transmitting electricity has been reduced since early March. This reduction is causing a shortage of cheaper French nuclear power for these nations, leading to an increase in wholesale prices across the region. RTE anticipates that these constraints will be resolved by early May, but further limitations are expected from mid-August. The situation underscores the interconnected nature of European power markets, where countries depend on each other for energy supply and demand balance, especially with the rise of intermittent renewable generation.

European Power Market Dynamics

The current grid constraints in France have led to higher power prices in neighboring countries, highlighting the challenges in the European power market. With France typically exporting cheaper nuclear power, the limitations have forced countries to rely on more expensive alternatives. For instance, Italy, which depends on France for cheap power during hot summer nights, may have to use costlier gas-fired generators. Additionally, the energy crisis has led to lower demand and instances of negative prices when supply from renewable sources like wind and solar overwhelms the network. As of this month, German day-ahead power prices are on average €40 more expensive than in France, with French month-ahead power falling to €25.62 per megawatt-hour and German equivalent rising to €62.82 per megawatt-hour.

Fiscal Pressures and Sovereign Ratings

Scope Ratings has raised concerns about the fiscal pressures facing some euro-area countries, particularly France and Belgium. The report highlights the challenges of tepid growth and higher borrowing costs, with France, Italy, Germany, and Spain expected to pay significantly more in interest by 2028. France and Belgium are noted for their large primary deficits and fragmented political environments, which complicate reform efforts. The International Monetary Fund's forecasts indicate worsening debt trajectories for Italy and France, with Belgium's debt expected to increase notably. Upcoming rating assessments by Moody’s, Fitch Ratings, and S&P Global Ratings will test France’s bond markets, with concerns over the nation's fiscal gap and debt levels.

Street Views

• Daniel Muir, S&P Global Commodity Insights (Neutral on European power markets):

  "Whether this is a short-term problem simply relating to internal maintenance, or if this is a more persistent issue that could reoccur in the future?"