I don’t want a free discount. How the trick to reduce the price of electricity in Europe works

I don’t want a free discount. How the trick to reduce the price of electricity in Europe works
I don’t want a free discount. How the trick to reduce the price of electricity in Europe works

For several months, it seemed that politicians across the European Union would just stare unhappily at graphs of rising electricity prices. Only the last few days have brought much-needed change. A number of politicians, including the Czech Minister of Industry and Trade Jozef Síkela, are calling for the reduction of electricity prices to a more acceptable value. The solution is supposed to be a trick that has been working in Spain and Portugal for three months.

Subsidizing the price of gas burned in gas-fired power plants is supposed to lead to cheaper electricity. The price of electricity corresponds to the variable costs of the most expensive source that has to be produced at the given moment. This includes, with exceptions, gas power plants. With the current price of natural gas over 200 euros per megawatt hour and the costs of emission permits, the price of electricity for next year comes to around 450 euros/MWh. However, due to market uncertainty, the reality is higher – 550 euros.

What with this? If we leave out non-market or anti-market interventions by the state such as regulation of electricity prices and subsidies to energy suppliers or end customers, the best solution from the set of available solutions is the artificial reduction of gas costs for power plants. Its advantage is a quick and effective price reduction as well as a limitation of the excessive profits that today’s producers of electricity from relatively cheap sources – nuclear, lignite, hydro or wind – show. Claims for financial assistance to households and companies from public budgets will also decrease.

Everything works somewhat on the principle of “I don’t want a discount for free.” Additional costs associated with subsidizing gas are borne by consumers. This is a similar model to the one we know in the Czech Republic in connection with the financing of renewable resources. However, it is worth it in the end. For example, the estimate valid for the month of August states that without state intervention, electricity in Spain would cost around 440 euros/MWh. Thanks to this intervention, it dropped to 160 euros/MWh, another 120 euros/MWh is a customer surcharge. The result is a price drop from 440 to 280 euros/MWh, i.e. by 36 percent.

Power plants ranked from cheapest to most expensive with regard to variable costs. This is an older graph, today the production of electricity from gas leads to a price of 450 to 500 euros/MWh. Source: CEZ

Indicative calculations for the Czechia come out better. Gas-fired power plants in Spain supply up to 40 percent of electricity, in the Czech Republic it is a maximum of 10 percent. The surcharge charged to electricity consumers would thus be lower. This is also because Spain has set the price of gas for power plants relatively low – at 40 euros/MWh. In the case of Central Europe, a higher value can be expected. For example, a gas limit of 100 euros/MWh would subsequently lead to an electricity price of around 240 euros/MWh.

Industry Minister Jozef Síkela wants to present a specific proposal at the Council of Ministers of EU countries for energy, which is scheduled for Friday, September 9. He probably won’t be the only one. Governments in Germany, Belgium and Italy are also calling for gas price regulation for power plants. The above-mentioned Spain also wants to recommend, based on its own experience, to other EU countries to follow its example.

It may be a coincidence, but after Monday’s statements by Minister Síkela and his foreign colleagues, a turning point occurred on the energy exchanges. Wild markets reacted positively to the information that ministers are willing to do something about the extreme situation.

The price of electricity on the German EEX exchange dropped from Monday’s record values ​​of around 1,050 euros/MWh to the current 550 euros/MWh (base annual contract 2023). Gas for next year on the Dutch exchange TTF fell from a record 330 euros/MWh to 192.50 euros/MWh.

David Tramba

The article is in Czech

Tags: dont free discount trick reduce price electricity Europe works

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