Bloomberg: What is behind the soaring electricity prices in Europe

　　Bloomberg News published an article titled: What is behind the soaring electricity prices in Europe. Europe’s energy ambitions are clear: Through the transformation of power generation and distribution systems, the process of low-carbon and low-emissions will be accelerated in an all-round way. But the current situation is a costly chaos. The tight global natural gas supply, the bottleneck of renewable energy, the slowest wind speed in the North Sea in 20 years, idle turbines, etc. have led to soaring electricity prices. As winter approaches, governments are ready to intervene in the turbulent energy market when needed to keep home heating and factories running.

　　1. What's wrong?

　　As countries recover from the pandemic, energy demand is gradually increasing. However, many coal power plants have been closed and natural gas inventories are low, which has caused energy prices to skyrocket. At the same time, the European continent is increasingly dependent on renewable energy, but renewable energy generally has an unstable nature, which completely exposes the fragility of the new energy system. Even in September, when the weather was mild, the prices of natural gas and electricity broke the record for the entire European continent. Electricity prices are expected to increase by 40% in the third quarter.

　　2. Why is there a shortage of supply?

　　In Europe, late summer is usually the time to replenish natural gas stocks in winter. After an unusually cold winter, the storage of natural gas reached its lowest level in more than a decade. Russia is Europe’s largest natural gas supplier, but its supply is limited because it is increasing its inventory. At the same time, Norway's natural gas supply is below average. China's economy is growing strongly and is hoarding LNG. Its source is mainly Central Asia, and European prices need to rise further.

　　3. What is the relationship between natural gas prices and electricity?

　　In 2019, approximately 23% of EU electricity came from natural gas, second only to 26% of nuclear power plants. Electricity is difficult to store, which means that large fluctuations in fuel costs quickly translate into fluctuations in electricity prices. At the same time, the technology of large-scale energy storage battery systems is developing rapidly, and European countries are also accelerating its construction, but it will take many years to provide sufficient storage capacity for renewable energy. Some European countries are increasingly dependent on electricity exports from other countries with abundant electricity.

　　4. How are electricity prices set in Europe?

　　Although short-term transactions are increasing, utilities and large companies generally buy and sell electricity years in advance. In these industries, economic development and long-term fuel cost forecasts are decisive factors. But more European electricity markets have traditionally used the daily price as a benchmark.

　　5. Which countries are most likely to face a power crisis?

　　Those countries with limited power connections with neighboring countries cannot get effective help from the European interconnection market in this supply crisis. Prices determine the market, and electricity will eventually flow to the places where electricity is most needed and the price is highest. The UK’s electricity supply is a combination of renewable energy, natural gas, nuclear power and coal, but many of its power plants are very old and fail from time to time. If the failure of conventional power plants occurs at the same time as days with little wind and no sunshine, the country will face power outages.

　　6. What does this mean for Europe's climate goals?

　　Renewable energy brings fluctuations to the grid, which will make the cost of achieving the goal of sufficient energy supply in the European continent very high. Germany is a good example - Chancellor Merkel's energy policy has cost German citizens hundreds of billions of euros. However, EU climate director Frans Timmermans said that price increases should not weaken the EU's determination to expand renewable energy, but should accelerate the development of the industry to provide cheaper green energy.

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