European energy traders are witnessing price increases that are difficult to comprehend.The cost of natural gas, used to generate electricity and heat, is about ten times what it was a year ago. The price of electricity, which is linked to the price of gas, is also several times higher than previously thought to be normal.
Energy markets are perpetually pegged upwards as Russia tightens the gas flow screw. European benchmark natural gas prices hit a series of records this week after Russian gas giant Gazprom announced it would temporarily close a major pipeline to Germany at the end of August.
Electricity prices are highly volatile. In the UK, wholesale prices for a megawatt hour of electricity – enough to power about 2,000 homes for an hour – reached an average of around £500 ($590) a day earlier this week, below levels last August. about five times as many. According to Rajiv Gogna, partner at consulting firm LCP:
In some countries, there is little leeway between these wholesale prices and what consumers have to pay in their monthly bills. On Friday, the UK electricity regulator lifted the energy price cap to around £3,500 a year, widely expected to nearly double what a typical UK household would pay for electricity and gas in the coming months. Reset. This surge reflects the steadily rising cost of gas and electricity.
Further price increases in the UK and elsewhere are expected, adding to the woes and fueling arguments for government intervention.
Why Do Natural Gas and Electricity Prices Continue to Rise?
Driving prices is fears that Europe will run out of gas this winter. Russia has cut gas flows to Germany and other countries. Even before her upcoming three-day closure, Nordstream 1, an important conduit for fuel to Germany, is running only 20% of its capacity. These cuts have forced gas suppliers to buy gas on the spot market at volatile prices higher than Gazprom’s long-term contracts.
Gas and electricity prices are closely intertwined in many countries, and this relationship exacerbates Europe’s predicament. There are several ways to generate electricity: coal, nuclear, hydro, wind and solar, but the price of natural gas has a big impact on how electricity is set. Like the UK, we need more power.
“Natural gas is the driver of electricity prices in Europe,” said Ian Cong, former chief executive of Centrica, a major UK utility.
This relationship makes Europe more vulnerable to Russian energy weapons. Unlike the United States, which has ample natural gas for export thanks to shale drilling, Europe has to import most of its natural gas, with Russia traditionally supplying about a third. . Long before Russia invaded Ukraine in February, European gas and power prices rose on supply concerns.
Europe moving away from fossil fuels
The European Union has started the transition to greener forms of energy. However, financial and geopolitical considerations can complicate efforts.
“Electricity markets get very stressed when natural gas supplies are tight,” said Kong, a former senior executive at energy giant BP.
Other factors are pushing up electricity prices, including falling river levels that are preventing fuel from being shipped to coal-fired power plants that Germany and other governments are trying to light instead of gas.
What are governments doing to stem the crisis?
Simply put, there are many. European Union countries such as Germany and the Netherlands are racing to fill gas storage facilities as a buffer against a possible complete cutoff of Russian gas this winter. Governments are also moving to increase supplies of liquefied natural gas from the United States and elsewhere, prompting energy companies to build new terminals to receive the cooling fuel.
The UK and other countries are providing financial aid to consumers, but it is not enough to cover the enormous increase in costs faced by households.
A wide range of politicians, consumer advocates and even energy industry executives are calling on governments to do more.
Keith Anderson, chief executive of British utility Scottish Power, recently said, “It’s becoming increasingly clear that this tough situation for British households is going to get worse before it gets better.” said. open letterAnderson suggested that the government intervene to cover rising gas prices. The proposal could cost tens of billions of pounds over the next two years.
Are energy markets working?
Government mandates have already forced the market to act in ways that would otherwise appear strange.
For example, in a normal market, high prices lead to gas sales rather than stockpiling. But the pressure to fill gas storage facilities backed by government mandates is pushing energy companies to buy and continue to buy expensive gas, pushing prices ever higher.
In some ways the storage program has been very successful. Germany’s salt caves and other sites are over 80% full, and will reach the 95% goal by November 1st.
But analysts say the urge to buy winter gear is driving up prices, causing some economic damage that could have been prevented.
“The market is completely corrupted and distorted,” said Henning Groustein, director of Eurasia Group. “If you were a half-hearted trader, you would sell all the gas you currently have in stock into the spot market and make an absolute kill,” he added. Arguing for other priorities.
Indeed, the pressure for further government intervention is increasing.
Many small UK energy suppliers have already gone bankrupt, driving up costs for both government and consumers. France has full control of her EDF, a large power company and nuclear power plant builder.
On August 17, Uniper, one of Germany’s largest gas companies, reported losses of more than €12 billion ($12 billion) in the first half of the year. Gazprom, but not offered at a higher market price. The company last month agreed to a bailout that included the government buying a large stake in the company.
“We at Uniper are effectively pawns in this conflict,” said the company’s chief executive, Klaus-Dieter Maubach, referring to the war in Ukraine.
Why won’t wind and solar power help keep prices down?
Analysts say so far, these technologies have done little to keep prices down. This is because natural gas is still the main determinant of electricity prices in the wholesale electricity market. LCP’s Chris Matson estimates that in 2021 UK electricity prices will be determined by gas more than 90% of the time, even though fuel only accounts for about 40% of total electricity production.
Some analysts say it’s time to redesign the electricity market to reflect the increasing amount of wind and solar energy in Europe’s grid. Unlike gas or coal generators, whose cost is largely determined by fuel prices, the operating costs of these renewable technologies are very low and stable. Their fuel is basically free.
“What we need is a better market design that is less dependent on natural gas power plants for pricing,” said Rahmat Poudineh, senior researcher at the Oxford Energy Institute. “It’s likely that electricity prices will be lower than this,” he added.
The UK and other countries are considering reforming their energy markets. But we are unlikely to push for radical change in time this winter.