Madness and relaxation – on Europe’s power exchanges they are very close these days. Last Monday, prices climbed to an incredible 870 euros per megawatt hour – only to be more than halved just five days later. On Friday afternoon they even fell below 250 euros, which is still more than twice as much as a year ago. And as early as next week it can go uphill again rapidly. What’s going on there? And what does that mean for the next electricity bill? An overview.
Why have prices fallen so much?
Traders attribute this to new considerations by the EU Commission, which could result in stricter control of the electricity market. For example, profits generated on the electricity exchange could be skimmed off more easily. However, another variable also plays a role: the gas price. He had recently fallen – after reports of constantly rising levels in Europe’s gas storage facilities. And the price of gas is a crucial variable when it comes to electricity.
Why does the gas price have so much influence on the electricity price?
This is due to the peculiarities of the electricity market. Here, too, the prices result from the interaction of supply and demand. Only the costs of generation are very different, while the product – the electricity – is always the same. When demand is low, the cheapest producers come first, such as wind turbines or solar systems. You still make a small profit even with low electricity prices. More expensive power plants, on the other hand, are idle. In order for them to produce electricity, the price must rise – which it does when there is higher demand. Then, for example, it is the turn of coal-fired power plants. If there is still not enough electricity in the grid, the price will continue to rise – until even the power plants with the highest costs can operate profitably. As a rule, these are gas-fired power plants. This sequence is called “merit order” and it not only has a serious impact on the price, but also on profits: because everyone collects the resulting exchange price for electricity – regardless of the cost at which they generate the electricity.
How much speculation is there in the market?
Of course, there are also traders on the electricity exchange who speculate on rising or falling prices. Unlike in many other markets, however, electricity can only be stored to a limited extent. In most cases, what is traded must also flow immediately. As a result, the real feed-in and also the real demand have a greater influence. This also explains why prices can suddenly drop to around ten euros per megawatt hour on a sunny Sunday afternoon. Then solar cells feed in a lot of electricity, but the demand, for example from industry, is low.
Were the record prices just an outlier and is the price going back to normal?
In view of the rollercoaster ride of the past few days, any forecast is out of the question. However, this weekend has a decisive influence. Then the transports through the Baltic Sea pipeline Nord Stream 1 should start again. If this happens, it could further calm gas prices. On the other hand, if Gazprom completely suspends transport, for example because of alleged problems with the last remaining turbine, there is a risk of new price jumps. Nothing has changed in terms of the demand for electricity: it comes mainly from France and southern Europe. Dozens of nuclear power plants are idle in France, and hydropower is weakening in southern Europe after a dry summer. So the calm could be short-lived.
What do the high stock exchange prices mean for consumers?
The situation is less dramatic than it often appears. Only part of the electricity is traded on the exchange, namely primarily for short-term needs or sudden surpluses. Electricity suppliers and municipal utilities usually stock up on electricity at fixed prices over the long term via long-term contracts. But even these contracts are not infinite. If they expire, they have to be renegotiated. The respective stock exchange prices are then an important point of reference. The procurement costs for suppliers will therefore increase in the foreseeable future and then also affect the electricity costs of households. But this happens with a delay.
What specifically is the EU Commission proposing to get prices under control?
Commission President Ursula von der Leyen has now announced that an emergency instrument against high electricity prices should come into force within weeks. In a discussion paper, the authority has already evaluated the advantages and disadvantages of various market interventions – and leaves no doubt as to which model they prefer. According to this, the EU governments should give citizens and companies incentives to cut consumption. The Commission could set concrete targets for the savings. The approach to gas is a model. In July, the authority formulated the goal of reducing consumption by 15 percent. If demand falls in this way, this should also dampen the price. In addition, the authority suggests that governments should set a price ceiling for electricity providers who produce significantly cheaper than gas-fired power plants. This is supposed to support their huge profits. If the stock market listing is higher – as it is now – the governments would skim off the difference. The cheap green electricity, nuclear and coal power plants would have to give up part of their sales. The Commission advises setting the level of this cap uniformly across the EU in order to avoid distortions in the internal market. In turn, governments should use the proceeds to support consumers and small and medium-sized businesses who are struggling with energy prices.
When might these regulations come into effect?
The Commission’s schedule is tight. Experts from the EU governments are to exchange views on the discussion paper at a meeting next Wednesday, and two days later the energy ministers will be discussing it at a conference. If the governments agree on the direction in which the interventions should go, von der Leyen would present concrete measures in her annual State of the Union address, which she will deliver in Strasbourg in a week and a half. After that, their agency could draft the bills.