The Energy Crisis
The price of electricity is rising, gas is becoming scarce, climate change is advancing: the current crises and geopolitical changes pose major challenges for energy policy. Do policymakers have to choose between securing the energy supply and protecting the climate? Should they keep nuclear power plants online longer than originally planned? Do we continue to plan for natural gas as a bridge technology? We need to speed up the expansion of renewables, increase energy efficiency, and expand infrastructures. Our focus is on bringing together insights on how to solve the acute crisis and shape the energy markets of the future.
The energy mix to date has given cheap natural gas from Russia a central role in heat and power generation. In power generation, gas-fired power plants were supposed to bridge the periods when renewables such as wind and solar did not provide enough energy to keep the supply stable. Large swathes of industry have relied on gas for their production activities for decades. In recent months, many have already devised ways to use alternative forms of energy. However, there is also the risk that particularly energy-intensive sectors of industry will move away. For private consumers in particular, the development of energy prices and security of supply is an emotional issue, as policymakers also expect households to reduce their gas consumption. In the long run, measures are needed to strengthen the resilience of the energy supply: away from fossil fuels and toward renewables.
This requires appropriate price signals. In addition, financial support is to be provided to households in need. A major challenge also remains the supply and decarbonization of energy-intensive industry, which relies on high temperatures. Biomethane from waste and residual materials can make a contribution here, but climate-neutral hydrogen will also be needed in large quantities.
Energy Mix and Consumption in Germany
Companies Struggle with High Energy Prices
The ifo surveys illustrate the impact of the energy crisis on companies. Business expectations recovered due to the abatement of the coronavirus pandemic, but in some sectors they are now more pessimistic than ever before. Material bottlenecks and high energy prices are leading to rising price expectations. Orders in the construction sector are being canceled. The energy-intensive chemical industry is cutting back production and the current situation is in decline. Business expectations for manufacturers of glass, ceramics, stone, and other nonmetallic minerals have fallen to their lowest level since 1991. Germany is sliding into a recession.
How Are Natural Gas and Electricity Prices Related?
In recent months, gas prices have risen due to a shortage of supply coupled with high demand to fill gas storage facilities. But why do natural gas prices make electricity prices so expensive, even though natural gas accounts for a relatively small share of the electricity mix? A normal electricity price in Germany was 50 euros/MWh up until the coronavirus pandemic. Then as now, however, it fluctuates strongly over time. If the feed-in from wind, solar, and hydropower together is high, then the price tends toward 0 euros/MWh, because these generators have no or negligible variable (or marginal) costs. Even negative prices are possible, reflecting the inflexibility of nuclear, lignite, or older coal-fired steam power plants. For these it is sometimes too expensive, too risky, or not even possible to shut down quickly and then ramp up again in the next hour. In the past, if the wind did not blow or the sun did not shine, the electricity price could well rise to 100 euros/MWh or more, because more expensive gas-fired power plants had to be added during this time. However, electricity generation in these power plants has now become massively more expensive. The upshot is that the price of electricity is always as high as the marginal cost of the most expensive power plant in operation (the marginal power plant). This principle of marginal pricing is the only efficient pricing system for electricity known to date, especially with high shares of fluctuating solar and wind power, and yet it is repeatedly called into question.
Acting in a Coordinated Manner in the EU to Increase the Energy Supply
Against the backdrop of rising energy prices, domestic political pressure is growing on Europe’s national governments to take action to reduce prices directly. The negative consequences for Europe as a whole are often ignored in the mostly national debates. Cross-border effects interfere with other measures that are actually urgently needed. One effective step to relieve the gas and electricity markets is to reactivate decommissioned coal- and oil-fired power plants and to extend the operating lives of nuclear power plants. This allows less gas to be used for electricity production. There is an incentive problem here in that a greater supply of electricity and reduced gas demand benefits all of Europe, not just the country acting in each case. Effective crisis management in this energy crisis requires European coordination.
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