Rising electricity price, will this situation last?

En Europe, les prix de l'électricité sont en hausse partout et la France n'est pas épargnée.

On September 30, 2021, Prime Minister Jean Castex announced that these prices were going to increase in early 2022, with an increase estimated at 4 % of regulated prices.

In Italy, Mario Draghi recently declared that, without government intervention, electricity prices were going to experience an increase of 40 % in the last quarter of 2021.

This outbreak intervenes in a context of generalized increase in electricity prices in Europe.The situation is also complex in Ireland, a country less well connected to the European electricity network, including the Irish Public Electricity Transport Operator (Eirgrid) has already alerted its population for the risk of power cut this winter this winter.

Despite nuclear, France affected

According to RTE, France produced in 2020 67 % of its electricity from nuclear power, an energy whose production costs should not fluctuate over time.

How to explain when France is also touched by these tariff increases?

A first element of response comes from a physical characteristic of electricity: the latter does not easily store.The price of electricity thus depends strongly on the costs of electricity under production.

A second element of response comes from the fact that the market price of electricity in France is very dependent on prices on European short -term electricity markets.The markets that guide short-term prices in Europe are the Day-Ahead market (day for the next day) and the intraday market (intrajournal).

The French Day-Ahead Prize has increased by 187 % since January 2021.How is this marked market price is explained?

Part of this increase is explained by demand factors

According to the IMF, global growth in real terms, that is to say the adjusted growth of inflation, was -3.3 % in 2020;Growth projections are currently 6.0 % in 2021 and 4.4 % in 2022, while the average growth in real terms was 3.8 % per year between 2000 and 2019.

As recently demonstrated by Alex O.ACHEAMPONG OF THE NEWCASTLE BUSINESS SCHOOL, energy consumption allows economic growth and not the other way around.

States must therefore increase in a marked and simultaneous manner their energy consumption to fuel their economic growth.A study by the IEA shows that this will be particularly the case for Asia.

This phenomenon created a demand shock which results in increases marked in the prices of gas, coal and oil.

In addition, climatic conditions at the beginning of 2021 in Europe, with a particularly cold winter and heating needs on long periods, also contributed to it.

Part of this increase is explained by supply factors

The mechanics of European electricity markets leads to that when a means of production is unable to supply demand, it is replaced by a second means of production.

As announced by the Scottish Giant of Wind Energy, SSE, the weak winds caused strong reductions in electricity production by wind turbines installed in the North Sea of the North of the North.These reductions in electricity production by wind turbines were mainly offset by fossil energy combustion power plants (natural, oil and coal)).It is therefore the production costs of these power plants that have drawn the prices of electricity in Europe in recent months.

The key component of the production costs of these power plants remains the price of the raw material used to produce electricity;However, natural gas prices have increased sharply in Europe - there is an increase of 393 % of TTF gas prices (the reference price on the European market);These prices were fired by lower reserves due, as we have seen, low temperatures from the start of the year.These reservations could not be reconstituted during the summer.

Gas supplies from Russia have indeed been lower since the start of the year.As underlined by Simone Tagliapietra and Georg Zachmann, researchers and contributors to the Bruegel blog, the European gas market is no longer indexed to oil prices, which makes European gas prices more dependent on international fluctuations.

However, the high demand for gas in Asia has drawn international prices upwards.In addition, an increase in the European CO2 price (+127.5 % since early October 2020) accelerated this increase in electricity production costs by European thermal power plants.

Is this situation temporary?

Part of the explanation of the generalized increase in electricity prices in Europe is economic: it is partly linked to economic recovery and the difficulties of supplying Russian gas.

Nevertheless, it is difficult to ignore the structural reasons for the variation in electricity prices in Europe and France.These structural reasons are increasingly due to renewable energies in the European energy mix resulting from the environmental policy carried out in particular by the European Commission.

Indeed, the growing share of renewable energies induces electricity production more dependent on weather conditions, which is not the case for fossil fuels and nuclear production.

The European Commission has also launched a new cycle of European climate policies (the "Fit for 55").This package of proposals is notably intended to use the European carbon market (EU ETS) to reduce greenhouse gas emissions by 55 % by 2030.

In this context, the measures will lead to the abolition of free quotas for a sector (aviation), the extension of the carbon market to other sectors (maritime and construction) as well as a higher decrease in the total quota quantityCO₂ emissions delivered between 2021 and 2030.

All of these actions should pull up the prices of European carbon emission quotas and therefore further increase the production costs of power plants.

These structural and cyclical reasons have an upward impact on electricity production costs, creating upward pressure on the price of electricity for consumers in France and Europe.

_______

By Dejan Glavas, Associate Professor, Essca School of Management

The original version of this article was published on The Conversation.