Energy bills are complicated – very. For gas that we use in homes or petrol in vehicles, an elementary understanding of supply and demand can largely explain the mega rise in prices on this front. The war in Ukraine, limited Russian supply, and booming global demand post-Covid don't provide much detail, but together this sketches a general picture of why gas costs so much.
Not so for electricity. Unless you've got your own energy source, you depend on a grid to keep the lights on. In comparison to piping gas to households, the logistics of electricity require much tighter management. Because whilst a surplus of gas can be stocked for later, the same doesn't go for direct power – produce too much and the grid risks overloading; produce too little... blackout.
Balancing the supply of electricity across an entire country (and now across national borders) requires a complex and precise regulation structure that operates quite differently to other markets. To respond to the immediate need for electricity each time a switch is flicked, suppliers look to a spot market – which provides prices in real-time to reflect the instant need for electricity.
But this alone doesn't explain the high cost of electricity. With a growing share of low-cost energy sources (renewables in particular have minimal costs after the initial investment), you would be right to wonder why electricity is also so exorbitant – almost €2,000 for an average consumption of 3,500 kWh over the course of this year. You might have heard that the cost of electricity is fixed to the cost of gas. But why?
Different energy sources have different production costs. Renewables are typically the cheapest, followed by nuclear and then fossil fuels (coal and gas). But the cost of fuel doesn't only depend on the source substance (nothing for renewables, relatively minimal for nuclear); there is also a carbon tax that increases greatly if the fuel is more polluting. This also means that renewables and nuclear (which doesn't emit CO2) are vastly cheaper sources than fossil fuels.
By fixing the price of electricity to the most expensive energy source feeding the national grid, the spot market is designed to ensure that demand is met by both the cheapest energy source, which is also the least polluting. As soon as a more expensive fossil fuel is part of the energy mix, the prices of all cheaper sources rise. Importantly, this allows operators of sources such as renewables or nuclear to make a profit on their product which, logically, would be invested in greater capacity so that demand can (in theory) be met by cheaper and less polluting sources. The cheaper the energy source, the greater the profit.
It's a clever design that in normal conditions incentivises a cleaner energy source. But with renewables dependent on the weather and therefore unreliable, and Belgium's nuclear capacity being cut down right at the moment when we need it most, we find ourselves dependent on fossil fuels to make up the electricity shortfall.
The drastic reduction in Russian (and also Norwegian) gas supplies has driven up the cost of gas and exposed the limits of the system. So long as the EU doesn't have energy sovereignty, the cost of energy becomes extremely volatile. This can be mitigated by state intervention but at the expense of the public purse.
It takes time to build new energy infrastructure, and that's not going to solve today's problems. Should Belgium rethink its nuclear exit?
Let @Orlando_tbt know.
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