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A “diabolical” system triggers electricity rates in Europe

A diabolical system triggers electricity rates in Europe Idafe Martín. Brussels Europeans have never had electricity rates so expensive, which for most of the bloc last week exceeded the 150 euros per MWh (mega watt hour).

There were daily increases of more than 25% and countries that paid more than 200 euros per MWh in some days. In order to reach those limits, which governments are trying to contain by reducing taxes and reaching out to electricity companies -which are turning to gold-, there was a perfect storm that mixes the regulatory system of the electricity market, economic conditions and even the lack of wind.

In Europe, some countries are more dependent on nuclear energy (France, Belgium), others are more dependent on coal (Poland) and others have been increasing their share of renewables in the energy mix to more than a third (Spain, Germany).

But the rises affect everyone, although some have already passed them at the rate paid by citizens and others, due to their regulatory system, will pass it at the turn of the year. The system “shapes” prices in a similar way across Europe, a system that artificially makes electricity more expensive.

Governments (through a company or public agency) calculate daily the energy they will need the next day and buy that energy from companies.

Some energies are cheaper than others and first buy MW produced through these generation sources. You start buying renewables, you go to hydroelectric, then to nuclear. When it is missing, they buy some coal and electricity produced with natural gas, the most expensive of all.

Virtually all of Europe imports gas and the major suppliers are Russia, Algeria and Norway. Gas is relatively expensive and the companies that import and distribute it also pay CO2 emission rights, which is required by European regulations to make “whoever pollutes pay”.

Until then, the system would be normal because electricity generated with gas would only be used in conditions of high demand and the cheapest would always be purchased first.

But the system is not so “normal”. Because the way prices are created means that all the energy bought one day is paid for at the price of the most expensive. If the MWh of electricity generated with wind mills was 20 euros and that generated from imported natural gas was 100 euros, everything is paid at 100 euros.

Governments try to get their hands on a structure practically shielded by the regulations. Meanwhile, they explain that the problem is not the emission price of the ton of carbon or that in a few months there would be less wind than usual. The problem is a price “formation” system that causes all electricity to be paid at the price of the most expensive.

Spain was the first country to react with measures that the Financial Times newspaper considered could be imitated by other European countries. The Spanish government seeks to recover annually up to 4,000 million euros of profits of the electricity companies because it considers that they were obtained through this price generation mechanism.

His other measures, such as reducing the VAT paid by the citizen in the electricity tariff or giving small aid (Greece will give 100 euros to each home) are a small patch that does not cover the spectacular rise in recent months.

The European Commission assures that it is following this boom in electricity prices but that for now it does not see the way or the need to intervene.

Brussels does not say it openly, but understands that part of the rise is impossible to contain (there are fewer renewables because for two months there is less wind the usual and the mills do not generate what they used to generate at that time) and that another part is even beneficial because it will force governments to continue investing in the form of electricity generation that is already the cheapest (renewable) at the same time the non-polluting.

The European commissioners in charge of policies against the climate crisis, led by the Dutch Frans Timmermans, number two of the European Executive, know and repeat that the ecological transition it will be done with high energy prices.

They add that the solution does not come by polluting more (in addition, coal and natural gas are the generation sources that pollute the most) but by compensating households with more problems to pay the rates. Some measures are beginning to be seen, such as the Greek check and small aid in many countries, but still far from enough to compensate for what electricity increased during the European summer.

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