When approaching the electricity price analysis and projections there are several key factors to keep in mind. The main factors that influence the price of electricity to be considered are fuels, power plant costs, transmission, distribution system, weather conditions, and regulations. These are the main factors driving the electricity markets dominated by fossil fuels. But nowadays there is a relatively novel fast emerging element driving the record high electricity price around Europe, wherein some countries have broken the 200 €/MWh barrier. This new driver is the carbon price market which is fast becoming the pretender to dominate the leading positions among factors that influence electricty prices in the decades to come.
Together with natural gas, the carbon price is driving up the cost of electricity in most European countries. It is becoming a key question for utilities and policymakers seeking to decarbonize both electric and non-electric sectors; hence it folds under regulations factors.
While the price of natural gas in Europe, which typically supplies about 1/5 of the EU’s electricity, has nearly tripled since January, the carbon price has doubled in the same period. At the same point when electricity prices were hitting the 200€/MWh, carbon was traded at over 61€ per ton.
According to Frans Timmermans, the EU Commission’s top climate official, carbon pricing is responsible for about one-fifth of the electricity price spike. At the same time, it is expected that the volatility of natural gas prices will grow as a risk the more Europe, Asia, and the rest of the world rely on the energy source as a bridge away from coal. Natural gas is less bad then coal, but it is still bad. This is a situation that requires a systemic approach. Dealing with only providing immediate responses to the events would lead to symptomatic solutions that alleviate the symptoms in the short run but deepen the severity of the underlying problem.
The underlying problem we are facing is not electricity price but climate change. Releasing more carbon dioxide into the atmosphere through coal, gas, and oil-based energy sources for electricity production would cause an immediate decrease in electricity prices. But the environmental and social cost of doing so would be devastating to our net-zero prospects.
To break the pattern of symptomatic solutions, we need patience and trust to boost the general confidence in making the necessary sacrifice today to benefit collectively in a not-so-far-away future. The natural step in this transition is what Frans Timmermans addressed some days ago when calling countries to accelerate their build-out of renewables, create more utility-scale energy storage, and improve transmission linkages across the continent, for times when renewable sources are intermittent.
The carbon pricing mechanism will be a central leverage point in the transition towards our sustainable energy future. The findings from the Electric Power Research Institute advise that imposing a carbon price on the electric sector, either through a cap, tax, fee, or similar policy, increases the costs of fossil fuels used for generation in proportion to their carbon content. At the same time, the increased cost for fossil-based technologies creates strong incentives to substitute other technologies, including wind, solar, nuclear, and carbon capture and storage. These incentives will lead to a point where, as the carbon price increases over time, this substitution effect lowers the carbon intensity of generation, effectively “decoupling” the electricity price from the carbon price.
On this path we will experience many downfalls, and due to the natural delays in the process of balancing the loop, many of us will have a hard time dealing with high electricity costs. It will get worse before it gets better. But the most important to keep in mind is that IT WILL GET BETTER!!!