Since this summer, Europe has been experiencing an increase in wholesale electricity prices, which is raising concerns and triggering political debate across the continent. The European electricity industry has identified a conjunction of phenomena that has led to this situation and is cautioning policymakers that long-term solutions should prevail over quick fixes.
What is driving this increase?
Europe imports roughly 60% of its gas needs, a dependency that increases vulnerability to global price volatility and demand. This dynamic was witnessed this summer as premium gas prices in Asia redirected liquefied natural gas cargoes from Qatar or the United States away from the European continent.
As economic activity returned to pre-pandemic levels in the first half of 2021, the demand for gas surged. Coupled with a chilly spring and low sun and wind generation in summer, Europe pumped into its gas stocks longer than usual. Currently, filled to 60% capacity, vulnerability to external market fluctuations is even higher.
European wholesale natural gas prices have skyrocketed, being now five times higher than in 2019. This directly impacts the electricity bill for end-consumers, as European countries still rely on gas for 20% of their power generation.
Carbon prices have also followed an upward trend, emphasising the need to increase the share of clean and renewable capacities for power generation. With the price of carbon paid by coal and gas stations having reached record levels it now represents as much as a fifth of the electricity bill.
Significant pressure on retail power prices is also triggered by the high taxes and levies applied to electricity. Currently, they represent approximately 41% of the electricity bill, an increase of 29% over the past decade.
Long term solutions over quick fixes are a must
Spiking electricity prices have prompted national policymakers to react on a whim and intervene in the functioning of the market. Such a response to short term price volatility undermines the EU emissions trading system, distorts the Internal Electricity Market, and derails the energy transition.
Electricity prices are dynamic and subject to fluctuations. Cases of negative prices in the day-ahead electricity market have also seen a sharp uptick, totalling 1837 hours in 2020, compared to 375 hours in 2018. This is the result of the higher penetration and integration of low marginal cost sources of generation, such as renewables. Accelerating their deployment is critical for reducing the exposure to oscillating gas prices.
Electricity prices are prone to be driven down further as more clean power installations come online. The capital and operational costs of renewable power plants are significantly lower than those of gas and coal, making the case for utilities to continue to invest. However, market interventions, like the Spanish Royal Decree adopted this September, severely jeopardise investor confidence and reduce visibility of long-term revenues.
These solutions were also emphasized by the Electrification Alliance, in a letter addressed to European Commission Vice-president Timmermans, Energy Commissioner Kadri Simson and the Chair of European Parliament's ITRE Committee, Cristian Busoi.
Eurelectric is closely monitoring the evolution of prices across Europe and the individual national measures.The secretariat has started engaging with the structure of expertise in view of shaping an informed opinion, that will be discussed by the Coordination Committee in October.