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By G. Uth – 12. October 2021 – 

The soaring electricity prices continue…

Barely three weeks ago, Sanchez and his Sanchitos announced that they could now guarantee that the general citizen’s electricity bill would be 20-25% lower.   

It was (once again) another a promise made, apparently without consulting the experts of the electricity market where electricity is sold as futures. The electricity market often finds itself used as a financial instrument, and this alongside the fact that the Spanish electricity market is one of the most volatile (hysterical) in Europe, even the smallest international or national “hick-up” in electricity supply or political decisions immediately results in large price fluctuations.  

Already the week after the government launched its shock plan, price increases on the daily price had made up for the savings and with the prices we had to pay last week – as much as 288.53 Euro per megawatt hour (MW/h) – the vast majority of residential customers will experience a significant increase in their next electricity bill.   

The average price for last week was thus 219.80 Euro per MW/h, compared to the 140.66 Euro per MW/h average price for the week in which the government launched its “shock intervention”.  The only real shock is the fact that once again, the government is “sucking up” to voters without really knowing what it is dealing with.  

As we mentioned in the last article, local fiscal interventions cannot significantly reduce electricity prices, it is just ‘bling-bling’ to deplete voters. I am also a little puzzled by the government’s one-sided focus on helping the private consumer, while no action has been taken at all to help businesses, which in recent months are experiencing double or triple electricity bills.   

It is a lot when a factory’s (or a hotel’s) electricity bill increases from 8,000 Euros per month to 15-16,000 Euros a month, or when your local bar’s bill increases from 1000 to 2000 Euro per month. Or more. A great many jobs are being lost in Spain because of the high electricity bills these months. Surely many would have liked to have exchanged an electricity bill of 20-30 Euro extra in exchange for keeping their jobs?  

Someone, last week, finally had sufficient patience to make it clear to the government that the high price of electricity is not an isolated Spanish phenomenon, but that it affects the whole world, mostly because of international policy measures to combat CO2 emissions – but also because of changing weather conditions, unusually cold winters and an extraordinary shortage – and thus large price increases – of gas (and quite a few policies related to this).    

However, high prices are most notably high in Europe, and here it is certainly clear that the quite abrupt increases came in the weeks after the EU published its new climate plan, and in particular the substantial, but necessary reduction in CO2 emissions, which caused the price of CO2 quotas to explode, and it is very much the price of these quotas that pushes the electricity prices, up, up and up.  

The government has now reached out to the EU to give the countries some tools to limit the electricity prices, including several proposals such as pan-European gas purchases and then finally – finally! – finally, to change the way the vast majority of European Electricity Exchanges calculate the “day-ahead” price.   

Because that’s the great sinner! Most European Electricity Exchanges calculate the daily price according to an algorithm that someone has named “Euphemia” and under “normal conditions” it “actually works kind of very well”.   

Euphemia works in such a way that you pay what is called the marginal price of today’s electricity, that is, you calculate the price of the last energy type purchased for the for being able to deliver 100% of the usage calculated in the whole of Spain, and then settle the price for that energy type to all electricity producers, regardless of how they produce.    

But for Euphemia, things go wrong when the market suddenly does something completely abnormal, and the price increases we are seeing right now, primarily caused by the combination of several hundred percent increases in both CO2 and gas prices, mean that the combination of the electric mix sold on the Electricity Exchange these days means that the last settled form of energy to supply 100% is either based on gas (we must remember,  that natural gas – despite its name – is not “clean” energy at all, but actually emits a lot of CO2 into the atmosphere when used to generate energy) or coal-fired energy production.   

This means that today, the most expensive price ever, is set at all manufacturers, regardless of their production price. This means, for example, that a nuclear power plant with a production price of between 6-14 Euro per MW/h, on Thursday last week received 288.53 Euro per MW/h  

That is, a profit of “a small” 4-6,000 percent.  And the green energies, whose production prices range between 15 and 35 Euro per MW/h, then “only” made a profit of about 1000 percent.  

So, we all pay the price of the most expensive forms of energy, and it is thought-provoking when, for example, in September 2021 coal-fired energy accounted for about 2.3 percent of total energy production, while gas or co-generation accounted for 12%. 61.4% of total energy production was non-CO2 emitting (including 23.7% nuclear power).  

Under normal conditions, it is typically hydro energy, which is the last type of energy purchased to reach the 100%, because it is quick and easy to turn the taps up and down a little, and which is in fact a cheap form of production, but there is currently a lack of water, because, Iberdrola in particular, has almost emptied the lakes and dams in which they normally produce energy,  and who can – from a financial point of view – think them in it when the profit margin can easily run into several thousand percent.  

Instead, if we let the Electricity Exchange pay each producer what you could negotiate the price for (for it is an Electricity Exchange) and then let the electricity suppliers those we meet in our everyday lives – those who sell electricity to us) pay an average price, the price increases would probably never have resulted in daily prices over 100 Euro per MW/h.  

So why don’t they just do that?  

Of course, one can only guess about this, perhaps it is a lack of “experts” in the government’s huge advisory group, or perhaps it is because some extremely politically strong electricity producers do not think it is a good idea when they on a  daily basis, and right now in particular, make really (really) good money from electricity generation, and the government itself was not in much hurry to reduce either VAT (IVA) or electricity taxes before the pressure became too great,  for the electricity tax and IVA is calculated by amounts, and not by consumption. Moreover, until taxes were lowered, the government had 4-5 doubled revenue on tax and IVA and the reduction of IVA from 21% to 10% to smaller private electricity customers still maintains a quite nice revenue increase for the government.  

BUT HOW LONG WILL IT GO ON AND HOW HIGH CAN THE PRICE COME UP? 

It’s hard to tell. Future prices in November and December have been over 300 Euro per MW/h a few times, but when Putin began to reap international political points (or to manipulate, only to later have lifted some of the restrictions that the EU has imposed with Russia) by promising to turn up the gas taps, future prices began to fall and Friday’s closing price on the MEF’s future market was 204 Euro per MW/h for both months, and this morning prices of between 180 and 202 Euro per MW/h were crossed.   

Let us keep our fingers crossed that these trends continue and that in Europe we can figure out how to force the electricity exchanges to change their algorithms so that we can have fairer electricity prices in the future.  

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