Overview
Drivers behind price surge
- Rising prices of fossil fuels commodities– expensive natural gas and coal due to (i) high energy demand because of global economy recovery, (ii) lower EU imports from Russia, the USA and the Nordic compared to the last 2 years as well as (iii) very high Chinese demand in LNG stemming from both the transition away from coal and a strong domestic power demand.
- Limited availability of RES – lack of wind over the summer (notably in North-Western Europe), low level in water reservoirs, long & cold Winter 20/21 and low temperatures during the summer.
- Security of supply constraints in some regions due to limitation in cross-border capacity allocations in some key interconnectors
- EU ETS carbon price increase (account for approx. 15% of recent increase). However, this value can be much higher for countries that are more dependent on fossil fuels, accounting for up to 80% of the price increase, where the cost of allowances accounts for 50% of the wholesale energy price).
- Higher energy demand– important economic growth world-wide linked to the ending COVID-19 pandemic, combining a strong demand recovery in OECD countries and a lack of availability of production units in regions still facing some lockdown constraints.
- Additional &exceptional factors – maintenance of gas infrastructure in the Nordic countries, fire at the French-UK interconnector IFA site in Sellinge, maintenance of higher number of nuclear plants catching up from COVID-19,
Political mitigation measures taken
- So far measures focused on the retail markets, with limited interventions on wholesale market, except in the Iberian Peninsula. EU governments aren’t adopting measures to correct wholesale electricity prices. The lack of similar intervention in Spain’s neighboring countries worsen the relative positioning of Spain’s regulatory framework.
- Most of the interventions aim at protecting vulnerable consumers with direct and indirect measures, protective or supportive – g. reduction of taxes, dedicated aids/”cheques” for low-income households, extension of the social tariff, etc.. This is the case of France, Belgium, Cyprus, Ireland, Estonia UK, Spain, Portugal, Norway, Italy, The Netherlands, etc.
- Isolated cases of measures applying to industrial customers(e.g. Bulgaria)
Distortive impact on the market
- Differentiated impact depending on the country.
- Differentiated impact on consumers depending on their profiles and contractual arrangements:
– No immediate ‘bill shock’ for most of small consumers engaged in a fixed contract.
– High impact for Large and/or energy-intensives consumers – some are already in a critical situation.
– Potential impact at the renegotiation of contracts
- Increase of production costs for fossil fuel-fired power plants, due to the increase of EU ETS carbon and commodity prices.
- The power generation sector is more protected as it applies a high level of hedging to mitigate risks linked to power generation and supply, thus less affected than customers.
- Risk of bankruptcy for (small) electricity retailers– the risk will increase if high prices continue over 2022, especially when they offer fixed price contracts exposed to high volume and profile risks.