Power prices is not an easy topic to talk about. First and foremost, there are lots of different power prices from baseload to peak, from wholesale to retail, from heavy industry to commercial prices. And each country across Europe has different prices and then there are renewables pushing up the power prices, or so they say. Then we have the European Union with their goal of making energy “affordable, competitively priced, environmentally sustainable and secure for everybody.” And how are they doing this. By creating an Internal Energy Market which creates greater competition across the European power markets.

How ineffective they have been can be clearly seen in the massively differing retail prices across Europe. At the low extreme, the Greeks pay an average of €12.7cents per kWh, while the Danes, at the upper end of the range, pay a plug rate of €30.5 cents per kWh. At the same time, wholesale power prices in Denmark are lower than in Greece!

The reason is for is very simple and this makes the EU goals very difficult to achieve and that is the prices consumers pay for electricity are, to a large extent, determined by national politics as regulations and government policies particularly on the tax side dictate what consumers have to pay on top of the actual wholesale power price. It is not, as many commentators will make you believe, renewables that cause these huge differences in retail power prices. This can be clearly seen in the most pro-renewable country, Germany where more goes to the German government (through VAT and various taxes) than to subsidies going to renewables.

The really ironic thing is that the heavy investment in renewable energy across Europe, has produced record-low wholesale spot prices across much of the continent. Thanks to the renewable build-up, there is an unprecedented amount of power capacity online, and at certain times of the day, there are significant power “overcapacities” across Europe. To make matters worse much of this renewables capacity is not owned or controlled by utilities. These assets are largely owned by individual citizens and by financial investors who are incentivized by mechanisms, such as feed in tariffs, to generate as much power as possible, while the utilities traditionally thrive on their approach of limiting supply. This is very important to understand. Utilities have traditionally operated in monopoly or oligopoly environments and have been able to influence the wholesale power to their benefit. The most obvious method to do this is to switch off capacity to tighten the supply, which in turn supports higher prices.

Low wholesale power prices are not good for utilities and this can be clearly seen in the miserable stock market performance of the major European utilities over the last five years. Utilities are not able to make the returns they used to be able to do unless of course they are in Ireland, the UK, Spain or Italy each of which are strapped with the highest wholesale power prices in Europe. These countries are virtual “energy islands” with very strong utility lobbies and limited interconnector capabilities to their neighbours meaning their power markets encounter less competition and are unable to benefit from the low prices in bordering markets.

For interconnected Europe (France, Germany, Netherlands, Nordics, Poland, Czech Rep) wholesale prices are currently at seven-year lows of below €35/MWh compared to 2008 levels of some €90/MWh. This trend is even more remarkable considering the closure of significant nuclear generation capacity in Germany during this period. The upside is that lower wholesale pricing are providing opportunities for intensive power users within Europe, such as chemical companies, to lower their production costs. Meanwhile back in energy island land, UK and Irish wholesale prices are over 50% higher than the rest of Europe, and I am so glad I am not running a production facility in either of those countries…

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