A Trader's Guide to European Energy: July 2025

The most important concept in power trading is that the grid must be perfectly balanced, every second of every day. Supply must equal demand. This is because electricity, for the most part, cannot be stored at scale. This unforgiving logic makes weather a primary driver of price.

When the wind blows, that marginal plant is free. When it stops, an expensive gas plant fires up, and its cost dictates the market price. This is the chaotic heartbeat of modern energy trading.

This is also where physical interconnectors become critical. During the periods of high wind in July, for example, the UK became a net exporter of power, sending its excess electricity across the channel to France, Belgium, and the Netherlands. These physical links allow countries to share resources efficiently, turning one nation's oversupply into another's cheaper power.

If gas plants are the price-setters, then the gas market is critical. In Europe, that means one thing: storage. It's the continent's strategic cushion against shocks.

This was compounded by a flat forward curve, where future gas prices were barely higher than current ones. This offered little financial incentive for traders to buy gas now and inject it into storage for the winter, amplifying the risk.

Such market structure, known as "contango" when future prices are higher and "backwardation" when they are lower, is fundamental to storage economics. A flat curve removes the profit motive for storing gas, as the cost of carry - financing, storage fees - isn't covered by a higher future selling price. This leaves the market dangerously exposed to short-term supply shocks, as no one has been paid to build up a buffer.

Lesson: Don't just trade the headlines; understand (and trade) the reality underneath.

Forum chatter revealed fascinating contrarian plays where markets seemed to be mispricing risk. One was the market's overreaction to U.S. tariff threats, creating opportunities in stocks that were unfairly punished.

The Carbon Price Divergence

Another oddity was the gap between UK and EU carbon prices. With the UK planning to link its Emissions Trading System (ETS) to the EU's, its lower carbon price represented a significant market inefficiency - and a potential trading opportunity ahead of the systems merging.

This was also seen in the Nordic power markets, where the European Energy Exchange (EEX) took the drastic step of waiving trading fees for a full year. Despite the region's advanced renewable infrastructure, a lack of trading liquidity meant that even small trades could cause large price swings, increasing costs and inefficiency. It served as a stark reminder that even well-designed energy systems can fail if the market mechanisms for trading are fragmented or uncertain.

The buzz in July was the accelerating shift from manual to algorithmic trading. We're beyond automating simple "if-then" rules at this point. AI agents are now being deployed to analyse complex, volatile situations - like a sudden drop in wind on a hot day - and make decisions in scenarios that weren't explicitly programmed.

This evolution is critical because traditional, rules-based systems struggle with the "combinatorial explosion" of variables in modern energy markets - weather, geopolitical events, and renewable intermittency create scenarios that can't be pre-programmed. AI, by contrast, can recognise patterns and make decisions in these novel situations, moving from a tool of automation to one that actively shapes and improves decision-making.