Europe faces an energy shock after gas and power prices sky rocket

The wholesale exchange in Leipzig; Germany, records the highest electricity prices in more than a decade. Industry fears for its competitiveness, but consumers could also soon be affected. At 70 Euros per megawatt hour (1000 kilowatt hours), the current prices at which electricity is currently traded on the wholesale exchange in Leipzig have reached their highest level in twelve years. Since March 2020, this even corresponds to an outright doubling within one and a half years.

CO2 certificates as price drivers

The reasons for the drastic increase in the prices at which companies trade current electricity volumes on the exchange are manifold, as energy economist Andreas Löschel from the University of Münster explains. The wholesale price is currently being driven by two developments in particular: certificates for the emission of the climate gas CO2 and fuels have become more expensive. At a CO2 price of 50 euros per ton, the generation costs of a gas-fired power plant increase by about two cents per kilowatt hour, for a hard coal-fired power plant it is about four cents and for a lignite-fired power plant even almost six cents. In parallel, gas prices have also recently risen very sharply, which makes electricity production even more expensive. According to observers of the electricity market, the nuclear phase-out is now also having an impact on wholesale prices. The shutdown of nuclear power plants, which is scheduled for this year and next, is making cheap nuclear power scarcer.

The industry faces a procurement problem

Industry representatives see further increases in wholesale prices as a potential threat to their competitiveness. The rise in wholesale electricity prices is a huge burden for the industry, warns Holger Lösch, deputy chief executive of the Federation of German Industries. With this price level, the European electricity market is increasingly distancing itself from the industrial electricity prices of competing markets, he argues, adding that certain energy-intensive companies are relieved of taxes and duties. Industrial consumers procure partial quantities at different times. In the first half of last year, they benefited from very low exchange prices in the Corona lockdown. It is not yet clear whether and how quickly wholesale prices will affect consumers’ electricity bills. Major electricity suppliers such as e.on do not yet see any reason for price increases. Energy purchasing, sales and service account for only about a quarter of the electricity price for households, a company spokesman explained. In addition, Eon purchases the energy it needs on a long-term basis. Therefore, short-term fluctuations as currently experienced should not have a direct impact on consumers’ electricity prices.