The article is published in Utilities magazine, issue November 2021.
The rising prices of electricity and energy sources such as coal, natural gas, oil, etc. continues. In Bulgaria, new records are being set for another month on the energy exchange, and will be felt by business consumers when receiving energy bills for October. In October, as can be seen in the chart, the increase is 124 BGN/MWh compared to the previous month, to a level of 369 BGN/MWh. Bulgaria is not an isolated case, this is happening in all other European markets to a greater or lesser extent.
* the data is till 23rd of Nomvember
The International Energy Agency notes that higher gas and coal prices combined with rising price for emission allowances have led to higher electricity prices. In Germany, electricity prices surged to their highest level in history last week, more than six times higher compared to a year ago. In Spain and Italy, where electricity production from gas plays a greater role in the energy mix and interconnection with other European markets is limited, the increase has been even greater. In recent weeks, lower-than-expected wind production has also pushed the prices higher.
In its recommendation for action and support on high energy prices, the European Commission notes that the effect of the increase in the price of natural gas on electricity is nine times greater than the effect of the emission allowances. The effect of the gas price increase on the electricity price is nine times bigger than the effect of the carbon price increase. From January 2021 to September 2021, the ETS price has increased by about 30 EUR / tCO2, which translates into a cost increase of about 10 EUR / MWh for electricity produced from gas (assuming a 50% efficiency) and about 25 EUR / MWh for electricity produced from coal (assuming a 40% efficiency). This is clearly outweighed by the observed increase of the gas price of about 45 EUR / MWh over the same period, which translates into additional electricity production cost of about 90 EUR / MWh. High gas prices themselves contribute to an increasing carbon price since they lead to an increased use of coal for power generation and consequently higher demand for emission allowances.
In Europe, many industries are likely to face a double impact – from rising energy costs and declining consumer demand. Rising electricity prices are already affecting the activities of energyintensive industries. Several companies in Europe (in Bulgaria as well) have temporarily curtailed their production, stating that they are operating at a loss due to the sharp increase in electricity and gas prices.
Figure 1. Percentage increase in electricity, natural gas and coal prices within 1 year, Source: International Energy Agency
In recent years, low electricity prices have led to a decline in the development of new gas and oil fields, the closure of coal-fired power plants, lack of nuclear projects and insufficient investment in renewables without subsidies. As a result, a supply gap has opened up, which remains unfilled. This has made supplies more vulnerable to stress, such as the unusually high demand we see today. Thus, the European energy system has become susceptible to price shocks.
To address the situation the governments of more than 20 European countries have implemented or are considering implementing various measures to mitigate the effects of high energy prices. The frequent urgent meetings of the energy ministers, as well as the recently issued guidelines of the European Commission, are proof of the seriousness of the situation. The main recommendation of the commission when introducing measures to support consumers is that they should not distort markets or lead to their fragmentation. Also, any type of aid, if not applicable to all users, is subject to approval under state aid regulations. This is one of the reasons why the Bulgarian government chooses to support all business consumers, not just some of them.
It is important to note that for consumers in some European countries the price shock is not so great as in Bulgaria. The reason is that in developed markets a large percentge (70 – 80%) of electricity is traded under bilateral agreements, where producers, traders and consumers fix the price of electricity for a longer period (quarter, half a year, year, etc.). Extreme prices are currently seen on spot markets, where purchases and deliveries are on daily basis. In Bulgaria, the exposure of traders and end customers to this short-term trading segment is significant – reaching over 90%. The negative consequences for consumers from such a model of market operation are significant. Producers also suffered from their high exposure to the DAM in periods of price collapse, during the first wave of coronavirus in 2020. With a high share of the short-term trading, price stability and predictability cannot be achieved, neither for producers, nor for traders, nor for end customers.
Many countries are trying to mitigate the effects of high energy prices by reducing or abolishing various fees and taxes such as VAT, network charges, excise duty, green allowance and others. This is possible in Bulgaria as well, but it requires a legislative change and a change in the EWRC price decision. In this case, RES producers will also be affected and assigned a higher market price on which the state will pay a smaller premium. All of them, without the large HPPs of NEK, are private companies and the majority have already hedged their generation in June and July under long-term contracts (1-year) and prices close to their then determined market price of 110 – 125 BGN / MWh. As a result, those hedges help to keep the price low for end customers supplied with green energy. In the event of a change in the estimated market price, all hedges must be renegotiated, and as a result the price for end customers will increase. On the other hand, a price adjustment is needed for network operators. Currently, they the electricity covering the technological losses at 2 to 3 times higher prices than those set by the EWRC, which creates a serious financial deficit in the companies. The balance in the implementation of support measures and decision-making for changes in prices and tariffs is difficult. The aim must be to mitigate the effects of high energy prices without undermining with the operation of the market or harming certain market participants.