Electric shock Wholesale power prices soar and may not come down

A combination of seasonal and fundamental industry factors have pushed up electricity rates. Consumers are unlikely to be shielded.
The sky's the limit.

Wholesale electricity prices in Germany are skyrocketing, just two years after they hit record lows.

The cost to retailers of buying electricity for use next year via the EEX energy exchange in Leipzig has shot up to over €50 per megawatt hour, an increase of €17 just since February, and the highest price in six years.

The increase is partly the result of seasonal effects, but is also due to more fundamental reasons that are likely to last and keep prices high.

“I am convinced we have to get adjusted to higher prices for the long term,” said Angela Pietroni, senior manager at Energy Brainpool in Berlin, a market analysis firm.

Wholesale prices at the beginning of 2016 were at lows of €20 a megawatt hour. At the time, there was a huge overcapacity in power from coal, natural gas and nuclear plants because the market was flooded with green energy from wind and solar.

Permit peak

In the meantime, producers have shuttered unprofitable plants, and wound down fossil fuel production as Germany continues its transition to renewables. In addition, operating costs have risen sharply as the spike in oil prices spurred increases in the cost of natural gas and coal as well.

Another factor has also hit costs. The price of emissions permits in the European Union Emissions Trading Scheme have risen sharply. The permits, which producers are required to buy to offset harmful carbon dioxide emissions, have risen to €21 a ton from €7.50 at the beginning of the year.

The permits kicked in at just €5 to €7 for years. But beginning with the new trading period in 2021, the European Commission will be upping the ante by permanently reducing the number of permits by 2.2 percent per year.

Permits purchased now can be carried over so the coming reduction is already affecting prices. “The race to be well-hedged has already begun,” said Ms. Pietroni.

Some temporary reasons are also pushing prices higher. The summer heat wave has forced some nuclear and coal-fired plants to reduce production because rivers have reached levels that limit the amount of water they can use for cooling. At the same time, many of France’s nuclear plants are shut down for maintenance.

Just when the higher wholesale prices will filter through to consumers depends on how careful their providers were in hedging their risks. Many firms took advantage of the favorable futures prices two years ago to hedge long term. Big industrial users are also hedged. Small- and medium-sized companies, on the other hand, were not so prudent.

But one thing is for sure: Sooner or later, consumers and companies will feel the effects of the higher whoslesale prices.

Jürgen Flauger covers the power industry for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: [email protected]