The energy industry is starting into 2022 in the same high alert state from the last couple of months. And some fear that the current energy crisis will even worsen. Could this new year bring some clarity to how the industry will develop in this decade? How does this affect end customers, industry players, and the progress of renewable energy sources? If you demand answers, you are in the right place.
Quickly recapping why prices went up in 2021, we can make out several factors contributing to this price surge. First, demand for energy increased worldwide during the recovery to pre-pandemic production capacities. At the same time, the supply of energy fell, as less renewable energy was produced in the summer and the winter before that was particularly harsh in many places, reducing gas reserves. The driven-up price of natural gas combined with a very expensive last tranche of CO2 certificates caused the massive price increase all over Europe.
As of today, oil prices rose again slightly and traffic volumes were higher over Christmas and the turn of the year, but natural gas got cheaper. The gas prices are currently back at the level of the end of November 2021, having fallen by around 62 percent, as mild temperatures keep the market largely quiet. Russia stopped gas deliveries at the end of December 2021, with the annual quota said to have been exhausted. In the meantime, US LNG tankers en route for Asia diverted to Europe to take advantage of the higher prices there, providing some relief. It looks like Europe will get through the winter relatively unscathed, but based on long-term market developments, a constant increase in average power prices could continue to be the norm.
Soaring energy prices caused retailers to get stranded due to their vanishing margins and some companies that already operated on thin margins had to cease their operations first. Especially in the UK, many energy suppliers fell into bankruptcy, and those who were able to survive this crisis had to significantly raise their tariffs. By doing so, they were giving their customers an out from their contracts, but with all companies raising their tariffs, most customers basically had few alternatives.
Governments were forced to step in to weaken the impact on commercial and residential consumers by capping prices or giving some tax relief to households. Despite all these measures, energy prices have increased significantly for almost everybody. Energy consumers could save themselves from increasing bills by still relying on a fixed-price energy contract or by switching to an alternative energy provider. Will prices return to normal, will they stay up, or will there be irregular price surges from now on? Truth is, nobody knows how the global gas and electricity market will develop in this decade. With so many factors out of their control, end consumers end up feeling helpless when it comes to assessing the cost of their future energy consumption. This is why the energy price increase created more incentives to become more self-sufficient - through in-house solar systems and by forming energy communities to uncouple from supraregional energy prices.
The high energy prices in Europe have intensified the situation due to a high dependence on gas. Increased prices for fossil fuels are ideal drivers for the energy transition because they make renewable energies more competitive. However, a higher share of renewables brings its own set of problems, leading to greater volatility in the market, potential grid instability, complexity for energy suppliers, and a costly, but necessary grid expansion. So just building new wind and solar parks is only one part of the energy transition equation. Power grids need to be balanced between generation and consumption at all times, and the increasing share of renewables leads to generation that fluctuates with weather and can rarely be predicted in advance with great accuracy. The available capacity must be traded on intraday trading platforms to balance these fluctuations in energy production throughout the day. This would not only allow for a higher share of renewables in the grid but can also contribute to stabilizing it to a degree to prevent possible outage and blackout scenarios. This could spare the grid operator from having to take last-minute action and rely so heavily on complex and expensive ancillary services.
What some might see as simply a time of misery and complexity can actually be interpreted as the signs of a more fundamental change in the industry. Climate protection measures caused the price of carbon dioxide (CO2) in emissions trading to rise, making coal-fired power generation less attractive in the long term, but it also makes electricity more expensive, as there are still few alternatives. The EU system is basically set out to ensure that coal does not become an alternative when gas prices are high - thus preventing higher emissions and holding the door open for electricity that is both energy-efficient and clean. However, the development of renewables, the decommissioning of nuclear energy and the way electricity markets are organised have increased Europe’s dependency on gas. Since Europe only produces a tiny share of the gas it consumes, it makes itself very vulnerable to price movements driven by external factors (e.g. increased demand in Asia or political moves from Russia). Looking ahead, the share of gas is going to inc
rease even more in Europe, which means that the high prices may remain and that other crises may occur. The price increases are affecting primarily energy consumers, which results in households being unable to pay their bills and companies going bankrupt. This is tragic and, even though the governments can step in to pay part of the bill, this will not solve the problem in the long term.
This crisis is pushing the EU Commission to make rather radical and controversial decisions such as naming nuclear and gas power plants "green" to keep their ambitious environmental goals in place. But no matter if the goal of raising the share of renewable energy is achieved or not, one thing stands tall: Especially in times of crisis and uncertainty, flexible power remains a crucial asset class in Europe’s power market to keep the grid stable and efficient. By relying on TaaS, there is a quick and easy way to provide this flexibility to the market. With our services, we are on a mission to provide the right framework to handle these upcoming energy crises and to enable necessary changes in the energy industry.