Europe’s electricity market is in a state of panic. Calming it down may require an unprecedented level of government manipulation.
Electricity prices are breaking new records every few days. Electricity future in Germany on August 29 (European benchmark) jumped above €1,000 ($998) per megawatt hour.Ten times the normal rate over the past decade. As factories on August 30 Around the block Suspended operations Due to Unaffordable electricity costsUrsula von der Leyen, President of the European Union Commission, said: “The electricity market is no longer a functioning market.” And she didn’t stop pointing the finger: “There is one actor – Putin – who is systematically trying to destroy it.”
Since the invasion of Ukraine in February, Russia has been tightening restrictions on natural gas supplies to Europe. On August 31, Russia completely cut off the flow of gas through Nord Stream 1, the continent’s main transmission pipeline. ostensibly for maintenanceand has halted other gas deliveries. Payment Disputes With European buyers.
Europe’s electricity market is connected to gas.
Generally, if a supply shortage causes gas prices to rise, other suppliers will step in to fill the gap. This is happening to some extent; Delivery of liquefied natural gas from US, Egypt and other exporters to Europe are growing. But Europe does not have the LNG import capacity to fully cover the lost Russian pipeline shipments. And regardless of how high the price rises, new supply chains and alternative energy systems cannot be built fast enough to fully solve the problem for at least a few years.
This is a problem for electricity consumers because how The power market is designed. Europe’s grid solicits bids from power generators—operators of gas, nuclear, or coal-fired power plants, or wind and solar farms—to sell it the power it needs. Generators are queued according to production cost. Those with the lowest production costs sell first, followed by those with higher costs, until the demand for supply is met. Typically, renewables are at the front of the line. With gas prices rising, gas plants are behind the line.
The wholesale price of electricity for a given day is charged to the last, highest-cost generator—now usually a gas plant. This market design creates an incentive to reduce generation costs, as the lowest-cost generator will have the largest profit margin. But it exposes power consumers to commodity market volatility. In general, it is hardly noticeable. But when a dictator bent on sowing geopolitical chaos is running the taps, the market can’t adjust to skyrocketing electricity prices, giving Putin the power to bring down Europe’s economy.
Europe may cap gas prices.
EU leaders said this week that they are. Make a plan To separate gas and electricity prices. No details of the project have been released yet. But it could include some form of gas price capping, in which governments pay the difference between the actual market price of gas and its price in the power and heating markets. Gas can also be shut down from other power generation sources in the grid bidding process. Governments can also reduce checks to low-income households or key industrial users to offset their high energy costs.
The risk of a price cap is that it is effectively a government fossil fuel subsidy that both removes any incentive to curb use and gives gas an unfair leg up on clean energy. But if the alternative is blackouts, cold buildings, and shuttered factories, it may be a risk Europe will have to bear.