Why has the price of electricity in Europe reached record levels?

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IN EUROPE THE cost of electricity is exploding. Prices had risen steadily this year as the economy began to recover. But they have increased in recent weeks. Since the beginning of September, wholesale electricity prices in Germany and France have increased by 36% and 48% respectively. They now hover around € 160 ($ 189) per megawatt hour, a record high. In Britain, prices stand at £ 385 ($ 532), up from £ 147 a few weeks ago. What explains the surge?

One of the problems is the supply of natural gas, which is used to generate around a fifth of the electricity in Europe. Shortages have pushed its price – and therefore the price of electricity – up. About a third of the European supply comes from Russia; another fifth comes from Norway. Both countries have been hit by disruptions, such as a fire at a processing plant in Siberia, causing supply to fall below expectations. European buyers, such as national gas companies, have turned to the liquefied natural gas (LNG) market to fill the gap. But they had to compete with buyers in China and Japan, where demand for LNG is on the rise. Between January and July, LNG imports to Europe were 15% lower than last year’s volume, notes Graham Freedman, an analyst at Wood Mackenzie, a research firm. In addition, Europe suffered a cold and prolonged winter which depleted stocks. They are about 25% below their long-term average.

Usually, European utilities react to high gas prices by using more coal. But the price of coal is also at record highs due to Chinese demand for electricity and production bottlenecks. The cost of European carbon permits is also at record levels. These give their holder the right to emit a quantity of greenhouse gases. Because burning coal emits more than burning natural gas, expensive carbon permits add even more to the price.

Another factor is the wind, or the lack of it. About a tenth of Europe’s electricity is produced by wind. In some countries, including Germany and Great Britain, the share is double. Recently, however, the air has been unusually calm. In Germany, for example, in the first two weeks of September, wind power production was 50% below its five-year average, says Roy Manuell of CIHI, a research firm.

High electricity prices are most pronounced in Britain. This is because it is particularly dependent on gas and wind power. The two sources generate around 60% of UK electricity, almost double the EU average. Another factor is that Britain is less connected than its neighbors to the European grid, which helps to spread the supply and demand for electricity across the continent and thus makes prices less volatile. This problem worsened this week when an interconnection between Britain and France was closed due to a fire.

Analysts expect prices to stay high through the winter, when demand for heat and electricity peaks. This is bad news for European consumers, who will bear much of it. Some countries are already trying to protect them. In Spain, the cabinet adopted emergency measures to limit the price of gas and the profits of utility companies. The Italian government is reviewing the way electricity bills are calculated. But policymakers will not be able to protect consumers from the most extreme impacts of a natural gas shortage. Some analysts believe that a particularly cold winter could trigger power cuts. Tempting utility bills can be the least of Europe’s worries.

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