The post-pandemic economic recovery in Europe is at risk of being derailed, household incomes will be put under strain, and the transition to a greener economy may be tarnished altogether due to the record-breaking spike in energy costs.
As autumn arrives on the continent, temperatures begin to drop gradually, and it becomes necessary to have heating; a confluence of the market, geographic, and political variables has crystallized into a perfect storm that shows no indications of abating is unlikely to do so in the future.
Analysts are already alarmed that the crisis, made worse by a combination of transient and structural issues, will continue for a longer period and that the worst is still yet to be faced.
Read more to find out why electricity prices are soaring high and what you can do to cut back.
Why Do the Energy Prices Keep Climbing?
Russia has significantly reduced gas exports. As a result of these cutbacks, gas providers are being forced to purchase gas on the spot market at higher and more variable rates than those stipulated in Gazprom contracts. The primary factor driving costs is the concern that the country may run out of gas this winter.
There is a strong correlation between the pricing of gas and electric power in many nations. This is a factor that has contributed to the current issue at hand. Although there are several ways to generate electricity, such as coal, nuclear, hydroelectric, wind, and solar, the price of natural gas significantly impacts the price of electricity. This is because gas-burning generators are typically compensated to go into service whenever a power grid requires more electricity.
Other variables, such as low-river levels, hamper fuel shipments to coal-fired facilities that want to fire up to replace gas, contributing to the rise in the price of electricity.
Will this Last for Long?
The heating season in Europe extends from October through the end of March. Still, it does not appear that wholesale prices will experience a big decline this year, even though some providers have promised to deliver more gas.
Energy can be purchased on the day of delivery, the day before, or even months or seasons in advance on the wholesale market. This allows suppliers to try to anticipate when costs will be at their lowest and how much energy they will need to acquire to meet the demands of their customers.
Suppose providers do not purchase an adequate amount of energy. In that case, they may be forced to purchase additional energy at a price that is potentially higher depending on the market’s movements.
What Is the Government Doing to Stem the Crisis?
European Union countries such as Germany and the Netherlands are making haste to fill gas storage tanks in preparation for a potential total suspension of gas supplies from Russia. Furthermore, governments have taken steps to acquire additional supplies in the form of liquefied natural gas from the US and other countries. They have also pressured energy companies to construct new terminals for receiving the chilled fuel, frequently with financial assistance from the state.
Although financial assistance is being provided to consumers in Great Britain and other nations, this assistance is insufficient to compensate for the enormous cost increases people face.
There is a diverse group of people, including politicians, consumer groups, and even energy business executives, demanding that governments do far more.
Is There Something Consumers Can Do?
The UK’s deregulation of the energy industry has resulted in a relatively large number of energy suppliers to choose from; nevertheless, recent increases in wholesale rates have caused more than 25 of these companies to go out of business.
Customers are typically urged to move to a cheaper tariff or provider when one is available. Despite this, consumer advocacy groups in Britain have recently stated that normal variable tariffs are among the most affordable options, subject to price caps.
If customers have trouble paying their energy bills, regulators like Ofgem encourage them to speak with their energy provider about possible payment arrangements.
It is also recommended to take measures such as improving the insulation, using less energy lighting, and installing smart meters, all of which may incur costs upfront. During the warmer months, reducing one’s energy consumption is significantly simpler.
Will Wind and Solar Power Help to Keep Prices Down?
According to analysts, thus far, these technologies are only modestly helping to cut prices. This is because natural gas is the primary factor determining power prices in wholesale energy markets.
According to some analysts, reorganize power markets to reflect the growing proportion of wind and solar energy on European electrical networks so consumers can make more informed decisions. These renewable technologies have relatively low and stable running costs, in contrast to gas and coal generators, whose costs are mostly dictated by the prices of their respective fuels.
Take Away
The recent spikes in energy prices are not the product of a single “shock event,” either on the supply or demand side of the market. Rather, they are the product of a combination of supply and demand forces that steadily tightened markets over several years.
Similar instances of geopolitical conflict and difficulties in energy production were witnessed all over the world during the energy crises of the 1970s. This crisis prompted innovative energy efficiency and conservation approaches and the development of renewable technologies that had not been considered previously.
But despite the crises, economies worldwide have continued to rely on the extraction of fossil fuels to stabilize and expand. After more than half a century, we are once again facing an energy crisis. We must reflect on the global lessons that have been learned in the past and take more decisive action to alter regional and global trajectories toward a future free of carbon emissions.
The energy cost may remain high for the foreseeable future, despite the current high levels. We have made it through previous global energy crises and price spikes. The most effective means for us to go forward are innovations in clean energy and concrete steps toward a future free of carbon emissions.
