Electricity and natural gas are both very expensive in Europe. The prices of the two commodities are frequently correlated in several European nations. However, the cost of electricity is not directly related to that of natural gas.
The reason that electricity rates vary by the minute is because electricity is the only commodity which can be produced and utilized at the same time. However, any excess electricity that is produced at that very minute must also be stored at that very minute.
This is why there are electric storage facilities that house the power generated for use in surplus. When a surge in demand occurs, the stored electricity is called for through an electrical grid and sent to that grid through the power lines to feed the excess demand. This typically happens during peak usage times.
Electricity that is generated during peak usage times is more expensive than electricity that isn’t in abundance of demand. When the peak time is over, and rates are lower than peak, this is the time that power customers who are on an electricity by the day contract usually power up their devices and use surplus power to charge their homes and devices for less money.
Natural gas and power costs in Europe are at record highs.
Although the prices of the two commodities are frequently correlated in many European nations, the prices of electricity and natural gas are not linked. Take a look at some of the most current electricity prices by the day at bestestrøm.no/dagens-strømpris, and compare with natural gas prices to see the trends that resemble correlations yourself.
Prices of Wholesale Electricity
First off, it is important to keep in mind that there are various wholesale electricity markets, which means that there are additionally various power prices that are established for contracts with various maturities.
Power providers often purchase a portion of the power they anticipate supplying at a particular time on the markets for futures or by means of bilateral contracts and the remaining quantity on the day-ahead as well as intraday markets. The term “spot market” is used to refer to both the intraday and day-ahead markets.
A summary of the wholesale power markets in simple terms
A baseload electrical power contract signifies an agreement to continuously buy or sell a certain quantity of electricity throughout the duration of the contract. The balancing plus congestion in the markets are also a part of the electrical pricing range, because they figure in the peak demand pricing.
The Relationship Between Natural Gas and Electricity Prices
The match between supply and demand on the spot market, calculated using the cost of production of the most costly power plant currently in operation, is what sets the price of energy. The merit order is the name of this method. Due to the fact that they do not need fuel to generate power or carbon emission permits, solar and wind farms may create electricity at very inexpensive marginal prices.
On the other hand, coal and gas-fired power plants must purchase carbon permits and pay for fuel. The precise ranking of these facilities in the ranking order is always influenced by the cost of fossil fuels, natural gas, and renewable energy sources as well as by how effective the plants are. This is the correlation between electricity prices and fossil fuel pricing that truly matters.
Each power market has varying levels of installed electricity producing capacity. Additionally, within a single market, the benefits of an order curve might vary based on the amount of installed capacity that can be used to produce energy.
Natural gas now costs more to generate than coal does to create power in Europe today. As a result, when there is a sufficient demand for energy, the price of electricity is currently determined on the spot markets by natural gas-fired power plants.
In many European marketplaces, this circumstance is typical. As a result, in markets where a significant portion of electricity generation comes from gas-fired power plants, there is some link between electricity pricing and natural gas prices. These two commodities’ prices are not, however, technically indexed.
Various situations require different sorts of power generators
When demand is low and wind and solar power facilities can produce an enormous amount of electricity, for instance, even nations with still-relatively low shares of renewable energy sources, like the Netherlands, already profit from very low or completely negative electricity costs.
Similar to this, hydropower facilities typically set energy spot pricing in Norway’s northern regions, for instance. Click here for more on hydropower facilities. Poland is another country where coal-fired power facilities frequently affect electricity pricing.
Price of electricity on the open market
Electricity is not purchased at wholesale pricing by retail customers. Typically, power providers increase the wholesale price by including a risk plus profit margin. Taxes and other fees are also paid by customers.
Retail customers often pay a fixed price per kWh for the term of their agreement or at least once per month, even though wholesale power rates might change from one hour to another or even between quarter to quarter.
Only a small portion of the overall retail price is represented by wholesale costs. In the first half of 2022, the average daily day-ahead power price in the Netherlands was around EUR.22/kWh, while retail customers paid approximately EUR.61/kWh, naturally depending on the type of deal they had.
Can the price of electricity be separated from the price of natural gas?
Although electricity costs are not correlated with natural gas costs, there is almost always a similar cost sequence between the costs of these two resources in many European nations.
The only direct method to break the link between the societal costs of producing natural gas and electricity is to cease utilizing it altogether. Unfortunately, if we wish to keep the electricity on in the foreseeable future, this doesn’t seem to be an option.
The EC might decide to cap the price of either electricity or gas, or it could design the wholesale marketplaces such that energy prices are no longer driven by the cost of production of the most costly power plant (https://energyeducation.ca/encyclopedia/Power_plant) in operation. The most effective solution must be devised, laws must be modified, and market participants need time to adjust to the new situation, hence altering the market model typically takes years.
Rapid modifications to market models might become problematic.
Furthermore, there is still no agreement on what the most beneficial alternative to the existing market paradigm is or even whether there is one at all. However, a proposed and hurried approach in light of the present energy crisis might be necessary, in keeping with other recent legislative reforms concerning energy supply and price.
Decoupling retail electricity costs from wholesale prices, for instance by limiting them, is an alternative to separating wholesale electricity pricing from natural gas prices. This logically implies that in this situation, energy providers would require financial assistance to close the gap between their expenses and the rates they may charge retail customers. If not, they risk filing for bankruptcy.
Costs are what matter in the end.
This implies that average power production costs will likewise be high as long as fossil fuel energy continues to be a major source of electricity generation in Europe and as long as prices for natural gas are high.
