The reason Europe’s electricity costs are rising

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Natural gas that is used to produce heat and electricity, costs around 10 times more than it did last year. Prices for electricity, based on the cost of gas are several times more than what was considered normal.

LONDON -Energy traders across Europe are experiencing price hikes that are difficult to comprehend. Natural gas that is utilized to create heat and electricity, currently costs around 10 times what it did last year. Prices for electricity, based on gas prices, are also higher than what was used to be considered to be normal.

As Russia is tightening the screws on gas flows as well as the energy market is stuck in a constant upswing. This week, the benchmark European energy prices for natural gas broke record levels after Gazprom the Russian gas giant, announced it would shut down an important pipeline that connects Germany in the month of August. It’s a decision that further fuels the market’s fears.

The price of electricity has been highly fluctuating. In Britain the wholesale cost of a megawatt hour of electricity (enough to power about 22,000 homes in an hour) set the record for a daily average of around 500 pounds which is $590, in the early part of this week. It was approximately five times the amount of August according to Rajiv Gogna, a partner at LCP which is a consultancy firm.

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In certain countries, there’s not much buffer between wholesale prices and the price consumers pay for the form of monthly charges. On Friday the British electricity regulator will re-set the price cap on energy that is widely anticipated to nearly double the cost that the typical British household is expected to have to pay for gas and electricity up to around 3,500 pounds per year. The rise is due to the steady increase in prices for electricity and gas.Additional price hikes in Britain and around the world are predicted which will cause more hardship, strengthening the case for intervention by government.

Why is it that the costs of electricity and natural gas keep increasing?

Inflicting the price is an indication that Europe will run out fuel this winter. Russia has cut gas flow to Germany as well as other countries. Even prior to the three-day shut down, Nord Stream 1, one of the main conduits for fuel for Germany is operating at a mere 20% capacity. The cuts are forcing gas suppliers to purchase gasoline on the spot market for greater and more volatile costs that they would pay under longer-term Gazprom contracts.

In several countries, gas prices and electricity prices are closely linked and this has contributed to Europe’s problems. There are many ways to produce electricity — like hydroelectric, nuclear, coal wind, solar and windthe cost for natural gas can be incredibly important in determining the price of electricity because gas-burning generators often paid to be brought into service when a power grid such as Britain’s requires more power.

“Natural gas is the driver for the European electricity price,” said Iain Conn, a former chief executive officer of Centrica the largest British utility.

This creates Europe more vulnerable to Russia’s weapons of energy. Contrary to those in the United States, which has an abundance of natural gas available for export due to the drilling of shale, Europe needs to import the majority of its gas as Russia generally providing about one-third. Prior to Russia’s invasion into Ukraine on February 1, European electricity and natural gas costs soared due to supply issues.

“When natural gas supplies get tight, the electricity market gets extremely exercised,” Conn said. Conn who is an ex-high level executive at BP the world’s largest energy company.

Other factors are driving higher prices for power, such as low river levels, which hinder the transportation of coal-fired power plants with fuel which Germany as well as other governments are looking to get going for replacing gas.

What can governments do to stop the crisis?

The answer is simple, lots. European Union countries like Germany and the Netherlands are trying to fill up storage facilities for gas as a protection against a total shut-off of Russian gas in the coming winter. The governments have also taken steps to obtain more gas through LNG natural gas coming from and around the United States and elsewhere and forced energy companies to create new terminals to receive this chilled gas, usually using state-funded financing.

Britain as well as other countries provide financial assistance to consumers, however, it is not enough to offset the massive increase in costs households are facing.

A variety of consumer advocates, politicians and even executives from the energy industry are calling on governments to take on more.

Are the markets for energy functioning?

Mandates from the government are already causing the markets to operate in ways that is a bit odd in other situations.

In a normal marketplace, for instance, the high price will result in selling gas and not keeping it in stock. However, the need to fill storage facilities for gas that is supported by government’s orders that have forced energy companies to purchase and continue to purchase high-priced gas, driving prices to ever-higher levels.
In one way the storage program is very effective. Salt caverns as well as other sites in Germany are over 90% full and are in line to reach the goal of 95% by November. 1.

However, the need to buy winter-proofing increases prices and is causing certain economic harm it was meant to stop Analysts say.

“The market is totally debased and distorted now,” said Henning Gloystein, director of Eurasia Group.

Indeed, pressure is increasing for more government intervention.

Already, several small British energy companies have been unable to pay their bills, which has led to higher prices for consumers as well as the government. France has taken the full control over EDF the major energy company and the manufacturer of nuclear reactors.

On August. 17 Uniper one of Germany’s biggest gas companies, reported losses of over twelve milliards euro ($12 billion) in the first six months of the year. The company attributed large portions of the loss to the burden of having to purchase replacement gas by Gazprom but not at market prices. Uniper formally agreed to a bailout plan, which involves the government taking an equity stake of a significant amount within the firm.

“We at Uniper have de facto become a pawn in this conflict,” declared Klaus-Dieter Maubach, the company’s CEO, speaking of the conflict in Ukraine.

Why isn’t solar and wind power sources helping lower prices?

Analysts believe that these technologies have only helped little in terms of price reduction since in the wholesale electricity market, natural gas is still the primary factor in the power price. Chris Matson of LCP estimated that by 2021, Britain’s electricity prices were affected by gas for more than 90 percent of the time, even though gas made up only 40% of the total power generation.

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