Prices fall – expert explains the great energy price paradox

Electricity prices are now falling on the electricity market and gas is no longer as expensive as it was a few months ago. Nevertheless, nothing will change for existing customers for the time being. In an interview with FOCUS online, the Berlin energy market expert Mirko Schlossarczyk from the energy consulting company Enervis explains why this is and why prices are likely to rise in the long term.

FOCUS online: Mr. Schlossarczyk, the electricity prices on the energy market are falling, but the price is not falling for consumers – why is that?

Mirko Schlossarczyk: Wholesale prices have fallen noticeably since the beginning of December. New customers currently get mostly cheaper tariffs than existing customers. This is due to the fact that the electricity suppliers procure the electricity in tranches over longer periods of time, and in the past year at significantly higher prices than at present. In the case of new customers, it is usually the case that they are only supplied in the next four to six weeks. In return, the supplier is only now stocking up on supplies or has recently bought supplies.

Conversely, when electricity prices suddenly rise sharply, you don’t immediately see higher costs for existing customers, but quickly for new customers. We experienced that last year when the prices for new customers were sometimes significantly higher than the existing prices.

But now the electricity price brake applies. Is that why prices are going up even more?

The Cartel Office is currently looking closely and examining whether particularly steep price increases are justified. The aim here is to prevent abuse at the expense of the state, which pays for the difference between the end customer price and the price cap (40 cents per kilowatt hour).

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What are the options to check this?

Schlossarczyk: The provider must submit its price calculation to the Cartel Office: The procurement prices or sales margin are decisive here. However, the utility cannot directly influence cost items such as grid fees, surcharges or taxes. From a marketing point of view, it is a meltdown if a supplier has demonstrably artificially inflated prices. Of course, one cannot rule out the possibility that there are black sheep.

Is it cheap for existing customers who get price increases to switch now?

Schlossarczyk: If existing customers get a significant price increase, it can actually be an incentive to switch or at least compare. New customer tariffs can include kilowatt-hour prices of around 40 cents or less.

The price brake is only a temporary measure that should apply until the beginning of 2024. What happens after that?

Schlossarczyk: In the best-case scenario, the wholesale prices for gas and electricity will continue to fall until then and the suppliers will lower their prices accordingly. Then the motivation for the state to intervene usually decreases. What we experienced last year were absolute market shocks to which the suppliers were no longer able to react.

And if the ideal case does not occur?

Schlossarczyk: Then the question is whether and how this system will extend the price cap. What the state currently has to subsidize is significantly lower than originally planned. Accordingly, one could say that the planned budget was not needed and that there is scope to extend the price cap.

Do you think this will happen?

Schlossarczyk: This is a political decision, but also a social and societal issue. I could imagine that there will be at least a temporary extension of the price brake.

How about the gas?

Schlossarczyk: This year we have an extremely mild winter, so consumption is lower. But the Russian pipeline gas supplies will also have to be replaced in the coming winter. Norway has increased its exports and the volume of liquefied natural gas (LNG) to Europe has increased significantly. Whether that will be enough to ensure the supply in a winter with long periods of frost, no one can seriously answer today.

But we now have LNG terminals – can’t they intercept that?

Schlossarczyk: It depends. In addition to these terminals, the infrastructure for domestic onward transport and intra-European connections are also needed. The so-called LNG regasification capacities are only part of the solution. What will also be decisive is how busy the terminals are and how much gas actually gets there. Against this background, compensating for the Russian pipeline gas outage will remain a challenge in the coming months.

Last year, ships filled with gas could not dock because the ports were full, so there was suddenly too much gas. What’s the problem?

Schlossarczyk: There is an intra-European transmission problem of liquefied natural gas (LNG) by land. It is relatively easy to unload LNG at many port terminals in Europe. But the problem lies in how to transport it further on land. For example, there is currently little transport capacity between Spain and France.

Why is that?

Schlossarczyk: Because the transport network is not yet designed for it. The gas supply in Europe has changed unpredictably and fundamentally since February 2022. This is an infrastructure problem that is very difficult to fix in the short term.

What does politics have to do to keep electricity and gas prices affordable in the long term?

Schlossarczyk: We are still in a reasonably liberalized energy market in which politicians should restrict themselves to setting reliable and fair framework conditions and intervening directly as little as possible. The electricity prices last year were essentially so high because the gas price and thus the electricity generation costs of gas-fired power plants exploded. The fear of a gas shortage should therefore no longer arise. You are already on the right track with the LNG terminals in Germany.

And how can electricity become cheaper in the short term?

Schlossarczyk: If all power plants that can produce can also go online to increase supply. In general, bureaucratic obstacles and regulatory delays in the expansion of renewable energy and grid expansion urgently need to be overcome.

Does that mean that nuclear energy should continue to be used?

Schlossarczyk: Nuclear energy should remain connected to the grid when security of supply is at risk. The Federal Network Agency has communicated this very clearly in some worst-case scenarios. The federal government must then think about leaving the three nuclear power plants (NPP) longer on the grid. However, I currently consider this to be unrealistic because there are clear signals from the governing coalition that it will not do so.

But there are also reservations from the industry…

Schlossarczyk: That’s correct. The energy industry is not the main driver of a runtime extension, as it has long been expected that the power plants will be shut down at an agreed time. If the service life is extended beyond April 2023, new fuel rods would have to be ordered. These generally have a useful life of around five years. Then you could let the nuclear power plants run longer.

What about the expansion of the power grid?

Schlossarczyk: That is a very central point. Politicians urgently need to ensure that the framework conditions for grid expansion are improved. We need more transmission capacities, especially at the critical points between northern and southern Germany. Things also look critical at the medium-voltage level.

In what way?

Schlossarczyk: We often have a lot of electricity from renewable energies in northern Germany, but this cannot be transported to southern Germany due to a lack of line capacity. These amounts of electricity are then missing in the south. Expensive replacement power plants, mostly gas or coal-fired power plants, have to be operated to cover the demand. The current from the north then often flows into neighboring countries or is curtailed. If the suppliers have to intervene in the grid again and again, it costs money. That affects the price.

Are there any additional short-term measures that might help?

Schlossarczyk: They are at least conceivable. The gas price was reduced to seven percent by the end of March 2024. In the case of electricity, however, it is still 19 percent. The state earns money from the high prices. Lowering VAT on electricity too could help.

How will the electricity market develop in the future?

Schlossarczyk: The nuclear power plants will be shut down soon, the coal-fired power plants will probably continue to run for a while. From today’s perspective, one can probably assume that there will definitely not be a nationwide phase-out of coal in 2030. The federal government’s EEG targets are quite ambitious. Also because the approval processes take far too long.

What does this mean in terms of price for the consumer?

Schlossarczyk: The end consumer price will probably stay at around 30 to 40 cents per kilowatt hour in the coming years and will tend to increase in the long term. Also because the surcharges in the electricity market, such as grid fees, are likely to increase gradually.

What is the gas market like?

Schlossarczyk: When it comes to gas, we can assume that we will no longer get any Russian pipeline gas in the future. The majority of supplies will be LNG – from various global sources. LNG is inherently more expensive than Russian pipeline gas due to transportation and conversion costs.

What does that mean for the gas price on the wholesale market?

Schlossarczyk: The price will probably be around 40 to 60 euros per megawatt hour in the long term. As a result, the price level for end customers will be higher than before the Ukraine war. However, we expect it to be well below the level of the previous year.