Consumers throughout Europe are facing significant increases in their electricity prices over the past months, in some cases reaching historical maximum levels.
As consumers will need to switch to electric heating appliances and vehicles to support the decarbonisation of the energy system, the recent trend has raised concerns that the switch to a full electric system could turn out to be very expensive for people.
But we should be careful not to draw the wrong conclusions. The recent increase in energy prices is not because of the energy transition, it’s because the energy transition is not going fast enough. Allow me to explain why.
Some are blaming the shift to renewables for sending electricity prices through the roof. It’s actually the opposite: it’s the fact that we do not have enough renewables which is making our electricity bills more expensive.
A recent report on Renewable Power Generation Costs by the International Renewable Energy Agency shows that today solar and wind power production is cheaper than fossil fuels like coal. What’s more, while fossil-fuel electricity has got more expensive in recent months, the cost of wind and solar has remained stable. From this, we can conclude that if we would have an electricity system mostly based on renewables, we would be less subject to this price volatility.
Others blame the recent increase in the price of Emissions Trading Scheme (ETS) allowances, which rose from €33 p/tonne of CO2 emitted in January to over €60 today, which has made it more expensive to generate electricity from fossil fuels. However, although ETS had an impact on electricity prices, it was not the main cause.
Instead, we should look at the strong economic growth which has followed the pandemic-induced slump, with demand for natural gas spiking, especially in Asia. In its latest Electricity Market Report, the International Energy Agency shows that gas prices in the first half of 2021 increased by 171% (average for Germany, France, UK and Spain) compared with the same period in the previous year, which is mainly due to an increased demand due to the economic recovery and a cold winter.
Why are consumers still paying so much for electricity then if the share of cheap renewables is rising? It’s because the most expensive power plants (gas and coal) used to cover peaks in demand determine the price of electricity on the wholesale market (the so-called ‘marginal price principle’). These rules mean that unfortunately, the benefits of cheaper solar and wind production are not being fully passed on to consumers. If renewable electricity can cover demand for more hours of the day, the cheaper electricity will be for consumers.
So, what can be done to make electricity affordable for consumers in the short- and the medium-term?
To start with, flexibility to settle energy bills and debts and a ban on disconnections for non-payment of energy bills would bring immediate relief to consumers. We should remember that for a non-negligeable number of consumers, these increases come after a financially difficult time during the COVID-19 pandemic. In addition, regulators should closely monitor the market and prevent and sanction any uncompetitive practice that may lead to artificial increases in prices, as reported by the Spanish consumer organisation OCU. Several of our members have also been asking their governments to reduce taxes on electricity, as a way to immediately reduce the burden borne by European households. In addition, social tariffs have to be maintained for low-income households to protect them against energy poverty.
Looking ahead, the focus should be on making electricity production cheaper and there is no better way to do that than to accelerate the shift to renewables. EU and national policy-makers should accelerate this shift and in the process reduce our dependency on increasingly volatile fossil fuel prices.
This also means making it easier for consumers to produce their own electricity (e.g., via rooftop solar panels), allowing them to make savings and be less affected by market trends. Policy-makers should support consumers in this and remove existing barriers to their installation or to consumer participation in energy communities. Finally, the cheapest energy is the energy that we do not use, which is why consumers should be supported in improving the energy efficiency of their homes.
Far from blaming renewables for the increase in electricity prices, we should be accelerating the transition to a renewables-based energy system. Only this will guarantee both affordable energy to European consumers and reductions in carbon emissions. Policy-makers should dedicate their efforts to accelerating the pace of the energy transition. The climate – and consumers’ wallets – depend on it.