{Disarmed} Why the future of the price of light in the medium term looks bad and will continue to break records, according to experts

August was the most expensive month in history in the price of electricity, but this September has started with crazy numbers. With more than 140 euros per megawatt hour, this Thursday the average price of electricity reaches a new record, according to OMIE data . And it's been four days in a row going up. The escalation does not seem to have a brake and unfortunately for the pockets of consumers, these high prices could continue to rise during the last quarter , according to the different experts consulted.

"The medium-term future looks bad," explains Joaquín Giráldez , an expert at Ingebau, a consultancy specializing in the electricity market. The trend of high prices is repeated in all European countries, with CO2 emission rights and the high price of gas being the main reasons mentioned to explain the current situation.

Will the situation change for the end of the year? Does the rise in the price of electricity have a ceiling? We spoke with different specialized experts in the energy sector to find out more details about how the situation is and what factors must be taken into account to try to predict how the market may behave in the near future.

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Too tied to a gas that will continue in highs

Electricity is at all-time highs and the main reason it will likely remain expensive is due to the high price of gas. Manuel Fernández Ordoñez , Director of Business Development in charge of the Management and Dismantling of Radioactive Waste at Tecnatom, states in a forceful way that "it is not very difficult to make mistakes, it is going to go up . "

This is not a personal prediction but is based on what the energy futures markets, gas price futures and CO2 futures are saying. Some futures, equivalent to what could be the "energy stock market", whose predictions for the last quarter of the year are that there will be a higher price than the current one.

"Unlike Filomena at the beginning of the year, it is not a temporary issue. It is becoming structural, with strong increases mainly due to China. The demand for gas is increasing and in Spain in particular we are a very dependent country of gas, "says Ordoñez.

The rise in the price of electricity is mainly due (by 50% according to the Bank of Spain) to the price of gas. And the gas futures markets suggest that it will remain high until the end of the year.

Eloy Sanz , researcher and Professor of Energy Technologies and Renewable Energies at the Rey Juan Carlos University, points out that since it is in a marginalist system, gas is the one that ends up setting the price of the rest and points out that approximately 50% of the increase in the The wholesale price of electricity is due to the price of gas , the influence of CO2 emission rights being 20%. Being in bull markets of both, this has been reversed in the price of light.

These percentages come from a report from the Bank of Spain in August on the recent evolution of electricity prices in Spain.

Image: Bank of Spain report

"It will depend on how much gas we use," says Sanz. A gas that in Spain comes from Algeria through the Maghreb-Europe gas pipeline (GME) and that does not go through a good time after diplomatic tensions in the area .

If we look at MIBGAS, the benchmark index in Spain for gas, the cost has been gradually rising over the last year. "The price of gas is not so volatile, but now it has practically doubled. We are with a gas price of double, above 40 euros per megawatt hour. Since 2017 it has remained stable between 20 and 30 euros," he explains Sanz, who predicts that it will be a situation that will end up changing: " until well into 2022 it may not go down, but in principle gas is not expected to be so expensive . We have not had this price for six years."

"The new Nord Stream 2 gas pipeline, which was said to lower the price, is now said to stabilize supplies but it will not help lower the price," explains the URJC professor. "We already have several lines between Russia and the European Union. This gas pipeline does not solve the problem, but aggravates dependence on gas and on Russia. Another case of energy incoherence from Germany," explains Ordoñez.

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"With Nord Stream 2 they are in a tug of war between the European Union and the United States in case sanctions are placed on Russia and Putin," Giráldez points out. The Ingebau expert believes that the current cost of electricity is quite justified taking into account the current price of gas and CO2 rights .

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The electrical efficiency of an exceptional natural gas combined cycle is 55%. And therefore, of each MWh of gas that is produced, if the gas is at € 50 / MWh, each electricity MWh will cost 50/55 = € 90.9 / MWh. A quick account to place a direct strip from the current gas price, which today is trading at € 52.18 / MWh according to the Dutch TTF index. But of course, to this we must also add other costs such as CO2 emissions.

Generating 1 MWh of electricity with a combined gas cycle emits 0.4 tons of CO2. If it is now trading at € 60 / T , the cost of CO2 in electricity MWh is € 24 / MWh. Adding to the previous cost, we are approaching the current final figure. Some calculations to which it will be necessary to add aspects such as the maintenance of the infrastructures and the minimum profit that these producers want to have.

In the case of the CO2 emission rights market, Sanz explains that the cost has also doubled and sets a possible maximum limit: " when it is at 100 euros per ton, there will begin to be many CO2 capture processes that begin to come out profitable . " Some emission rights that have caused, for example, that coal has practically become obsolete in Spain in a year and a half , when until 2025 in principle it was not expected to reach current levels, says Sanz.

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The current forecast for the last quarter is € 131.50 / MWh

"The problem is not the 140 € / MWh today. It is that for the last quarter of the year an average above 130 is expected. We do not know if it will finally be that price or not, but it is what the market calculates. It is an outrage, because with so many hours that we have that average ... ", they explain from Ingebau.

The futures market is not always right, but it is an indication that they expect the cost of gas and CO2 to remain high. "These forecasts are updated daily. There are many people working to try to get ahead," they point out, recalling that, as in the stock market, it is a forecast very susceptible to statements such as those of Putin and his gas pipelines. For the first quarter of 2022, current forecasts drop slightly to € 119 / MWh .

Gas consumption is seasonal, there is usually more in winter than in summer . Experts tell us that the price is usually cheaper in summer, but it also adds that gas inventories are not as they should be, being at their lowest level in the last 10 years .

Whether the (high) forecast is fulfilled will depend on the type of winter and weather we have. And therefore of the need to opt for gas or to have enough with renewables such as wind, supported by the rest.

The key to seeing if the prediction of 131.50 euros per megawatt hour on average that the futures market foresees today is fulfilled is whether we have a cold end of the year or not . "Normally there is a peak in winter and another peak in summer. In summer mainly due to air conditioning and then heating. In 2007, the historical maximum of energy demand in Spain was in December, " says Ordoñez. "Now we will begin to turn off the air, but turn on the heaters. And here there are less electrified because many are still gas, which increases the demand for gas even more."

The futures market for the fourth quarter of 2021 points to an average price of € 131.50 / MWh.

Eloy Sanz does not see it so clearly, who points out that the peak of consumption has been changing and little by little people have more air conditioners and that peak goes more to summer. "It will depend a lot on the weather conditions. We already saw it with Filomena. There were days at the end of January where prices were practically zero."

The price of electricity changes every day and varies a lot with each season. While in summer the wind power is calm, in autumn and winter there are days that it picks up and the production can reach 40 or 50% wind power at all that comes a strong wind . Coupled with low demand, the price of electricity can drop dramatically on those days. The same does not happen with solar, where experts point out that it does not represent that much and even in the months of June / July it remains at 16%.

"August is usually a quiet month because the industry rests. If we think about it, August has been very tough," they point out from Ingebau. "Now that many industries start in September it is being noticed." The autumn period usually has a higher demand than summer, however it is windier and much more wind energy is produced.

"To the one that a hurricane deviates and it becomes windy, those days we can have prices below 10 euros . I am convinced. Which makes it much more striking that the medium is going to be € 131.50 / MWh", Giráldez explains.

Experts point to an end of the year with extreme days, going from a cost of electricity below € 10 / MWh to the old limit of € 180.30 / MWh that will most likely be beaten.

The consultant does not rule out that we are going to break the barrier of 200 euros per megawatt hour before the end of the year and in fact takes the opportunity to remember that this year the lower limit of 0 and the upper limit of € 180.30 / MWh were eliminated , that in countries like Germany did not exist. Now becoming € -500 and € 3,000 / MWh.

The underlying problem: without interconnections and with a great dependence on the daily market

Joaquín Giráldez points to two factors that are quite important to understand the situation in which Spain finds itself with regard to the cost of electricity. Two structural problems that make it difficult for the situation to change drastically in the medium term . If the weather is "good" we will be able to generate cheaper energy, but if demand skyrockets and we have to opt for gas, we will face a significant cost.

What about our European neighbors? Why is the European Union not taking urgent measures? The high cost of gas has caused most European countries to have a record price, but their energy market is often better prepared. And we are not talking about the type of energy they are betting on .

The first point is the interconnections . That is, the capacity of the electricity market to receive and send energy to nearby countries. If, for example, there is a gale in the North Sea and the wind energy is so much that it exceeds its demand, they can send it to other countries in order to get a negative electricity price.

"Having a good interconnection helps lower the price," explains Giráldez. And he points out that while there is always talk of renewable energy targets, we must not forget that the European Union requires 10% of international connections by 2020 and 15% by 2030. "In Spain we did not reach 4%. And it is a problem, " says the expert. "Imagine that we start to assemble mills and plates, with a lot of sun. But if our interconnection does not allow us to sell the surplus energy, we have to stop machines, with the respective economic loss."

The second aspect to take into account is the high influence of the wholesale market on the final electricity bill . If these days we are talking so much about the record in the price of electricity, it is because this figure is usually reflected in the consumer bill. In Spain, 10.7 million users bet on the PVPC regulated market rate.

Although the cost of gas is a problem for the whole of Europe, Spain suffers especially from its low level of interconnections and from transferring the wholesale cost to the consumer quite directly.

"There is a big difference with France. There the pool has very little liquidity. A very small percentage enters through the pool, the rest is through bilateral markets," says Giráldez, who gives the example of the ARENH agreement between the nuclear companies and the state for be able to get energy at a stable price. "In Spain almost everything goes through the daily market. The hourly PVPCs, but the fixed contracts are based on future quotes . If you contract a fixed rate now, the prices will be based on the cost for the last quarter. France has a bilateral retail level so that people do not buy at the pool price, but at € 45 / MWh, "they explain from Ingebau. A fixed price for certain energy that, according to Ramón Roca, director of El Periódico de la Energía , could be "counterproductive in the medium and long term."

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The final electricity bill does not have to follow the same trend

According to the experts, the technical and regulatory measures of the electricity market do not make sense in the short term, since they are too ambitious projects, which must pass through Europe and their effects would not be seen for some time. However, they do point out that it is possible to apply fiscal measures , to immediately and substantially lower the electricity bill.

"Most of the electricity bill is not the wholesale price. There are options such as lowering VAT, reducing taxes or, for example, taking tolls off the bill and introducing them in the State Budgets. Acting on this additional part to the market yes it could affect the final bill , "says Eloy Sanz.

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Due to the high taxes for CO2 emissions and the high collection, some experts point out that the Government could reverse this over-income in some way, beyond lowering the VAT to 10%. Another added measure that would not affect in any case the cost of the electricity itself, but it does affect the bill.

"It may be a mild winter at the end of the year, Algeria will send us gas through the pipeline, it may all work out ... but as long as we do not have cheap storage and effective batteries on a large scale , we will continue to depend on natural gas for times of high demand. For many renewables, the last megawatt will be provided by the combined gas cycle and this will set the prices. Until the batteries arrive, which until 2030 do not seem to be there, we will be faced with this recurring problem ", concludes Giráldez .

Image | Johannes Plenio

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The news Why the future of the price of light in the medium term looks bad and will continue to break records, according to experts, was originally published in xiaomist.com by Enrique Pérez .