High electricity prices? It's time to accelerate the energy transition - Consumer Cornerhttps://www.beuc.eu/blog/high-electricity-prices-its-time-to-accelerate-the-energy-transition/Consumers throughout Europe are facing significant increases in their electricity prices over the past months, in some cases reaching historical maximum levels.
As consumers will need to switch to electric heating appliances and vehicles to support the decarbonisation of the energy system, the recent trend has raised concerns that the switch to a full electric system could turn out to be very expensive for people.
But we should be careful not to draw the wrong conclusions. The recent increase in energy prices is not because of the energy transition, it’s because the energy transition is not going fast enough. Allow me to explain why.
Some are blaming the shift to renewables for sending electricity prices through the roof. It’s actually the opposite: it’s the fact that we do not have enough renewables which is making our electricity bills more expensive.
A recent report on Renewable Power Generation Costs by the International Renewable Energy Agency shows that today solar and wind power production is cheaper than fossil fuels like coal. What’s more, while fossil-fuel electricity has got more expensive in recent months, the cost of wind and solar has remained stable. From this, we can conclude that if we would have an electricity system mostly based on renewables, we would be less subject to this price volatility.
Others blame the recent increase in the price of Emissions Trading Scheme (ETS) allowances, which rose from €33 p/tonne of CO2 emitted in January to over €60 today, which has made it more expensive to generate electricity from fossil fuels. However, although ETS had an impact on electricity prices, it was not the main cause.
Instead, we should look at the strong economic growth which has followed the pandemic-induced slump, with demand for natural gas spiking, especially in Asia. In its latest Electricity Market Report, the International Energy Agency shows that gas prices in the first half of 2021 increased by 171% (average for Germany, France, UK and Spain) compared with the same period in the previous year, which is mainly due to an increased demand due to the economic recovery and a cold winter.
Why are consumers still paying so much for electricity then if the share of cheap renewables is rising? It’s because the most expensive power plants (gas and coal) used to cover peaks in demand determine the price of electricity on the wholesale market (the so-called ‘marginal price principle’). These rules mean that unfortunately, the benefits of cheaper solar and wind production are not being fully passed on to consumers. If renewable electricity can cover demand for more hours of the day, the cheaper electricity will be for consumers.