One Thousand Euros? Yes, this is not a typo. Yes, it will happen. The question here is “when”.
And it has already happened in other regions. Wholesale electricity prices in the Electric Reliability Council of Texas (ERCOT), Texas’s primary grid operator, averaged $22 per megawatt-hour (MWh) in 2020. However, during periods of strong power demand or when generating resources become unavailable, wholesale electricity prices in ERCOT increase, sometimes substantially. In February 2021, wholesale prices held at or near the $9,000/MWh ERCOT price cap for approximately 77 hours, from midnight on February 15 to the morning of February 19.
The five days of unaffordable electricity in Texas:
Climate Change is urging us to take action in the decarbonization of the electricity supply. Thus, Governments are designing and implementing National Energy Transition Plans. Every politician is trying to be faster and harder on decarbonization. E.g. The European Union is accelerating its commitments with the Paris Agreement under the “Fit for 55” program. And the last one is a rotten egg!
But did anyone estimate the short-term impact of these accelerated transition programs on the electricity price? I am sorry if you did not know it but the necessary transition to green energy increases the electricity bill.
In addition to record-breaking demand, delayed power supply projects, the closure of thermal power plants along with temporary shutdowns and delays in natural gas and wind power projects will dampen the amount of electricity available. And as any critical resource, its scarcity pumps its price up.
The Electricity Market
EU countries trade electricity on wholesale markets where the goal is to cover the energy demand for every single hour of the following day.
The markets follow a marginal model, which means the final price of electricity for the following day is pegged to the price of the most expensive fuel required to meet projected demand. The system is designed to provide utilities with the opportunity to recover investments and operating expenses.
If 100 percent of demand can be met with wind, solar and nuclear, which have very low generation costs, the price of power can be very low or even negative.
But when the expected demand exceeds the supply capable of being generated by clean power, costly fossil fuels have to be used to meet demand, and the price of power is pegged to that value. That’s why the spike in natural gas costs is bad news for power prices.
The World is upside-down
We are pushing for green energy but gas demand from power stations has been high due to lower than average wind speeds in Europe, curbing power generation from wind farms. Gas suppliers are likely speculating with gas prices as they see a huge benefit opportunity. So, coal demand has risen as power generators seek to avoid sky-high gas prices. With coal plants emitting double the amount of carbon dioxide as gas plants, this has, in turn, led to more demand and higher prices of carbon permits.
We are feeding this vicious circle. We were trying to decarbonize the mix and decrease the cost of electricity production and the outcome is more thermal power, more CO2, and higher electricity cost.
As a result, the EU average Month-to-date price is currently +220% the EU average Year-to-date, showing that countries more dependant on intermittent renewables are more sensitive even to local thermal power prices.
And the “D-day” will arrive.
The perfect storm is growing. We can bury our heads in the sand but there are a lot of signals showing the D-day is close. Let me draft the conditions to trigger it:
- Carbon permits will be so high that some thermal power plants will shut down, temporarily or definitively. For those still running, this would be a huge increase in cost per MWh
- Gas prices will rocket, adding another super cost to the MWh. Either if this is due to pure speculation or we really are short in gas storage, or because APAC is buying all the available LNG
- Big companies will have acquired most of the power capacity through Future & Forward contracts, leaving few remaining capacity to be negotiated day-ahead or even intraday.
- Cold weather will knock at our doors, increasing electricity demand
- Renewables will not produce expected electricity, due to severe winter conditions
- Energy Storage will still be a ghost
Thus, anyone will fight for any MWh available in the system and they will be open to paying a fortune. That perfect storm will bring us a MWh at 1.000 € or higher.
And there are no short-term mitigation actions rather than drastically reduce demand (e.g. Spain’s Sidenor suspends production due to spiralling energy costs) and to implement flexibility measures in the CCGT power plants to improve the coexistence with renewables.
If not, get your wallet ready to pay a huge electricity bill. It is coming…