Europe, where natural gas prices have risen due to the conflict between Russia and Ukraine, has recently faced severe tension in the power system due to limited solar and wind power conditions in winter. With the structural shift in the energy structure from coal and nuclear power to wind and solar power, the impact of renewable energy supply on European market pricing is increasing.
Electricity Prices Have Risen for A Variety of Reasons
As winter approaches, many European countries are facing the severe problem of a sharp increase in electricity prices. According to data from the European Power Exchange (EPEX), Germany’s hourly electricity prices soared to an 18-year high of 936.28 euros/MWh (short-term electricity trading price) in an auction recently, as wind power generation levels are expected to be far below seasonal normal levels. On the same day, spot electricity prices in many European countries soared, and the average spot electricity prices in France, Spain and other countries all hit a 21-month high.
The German Ministry of Electricity claimed that the peak in electricity prices lasted only a few hours and had little impact on the costs of households and most businesses, because these companies usually signed power supply contracts that guaranteed long-term prices. Although long-term procurement can balance this, in the long run, both European industrial production and residents’ lives are under great pressure due to frequent fluctuations in electricity prices.
Taking Germany as an example, data from the German Energy and Water Industry Association shows that the average electricity price for German households in 2024 will be 40.92 euro cents per kilowatt hour, which is still higher than the level before the energy crisis in 2022. Danish utility Energi Fyn announced that the unit price of electricity in Denmark may reach 11 kroner per kilowatt-hour, the highest level since 2022.
The main reasons for this phenomenon include the following aspects: First, the shortage of energy supply. The conflict between Russia and Ukraine has led to a significant reduction in the supply of natural gas in Europe. Natural gas is an important energy source for electricity production. Although European countries have partially made up for the gap by importing liquefied natural gas, its price is much higher than pipeline natural gas, which has pushed up the cost of electricity. Second, unfavorable climatic conditions. In the summer of 2024, many parts of Europe experienced drought, and hydropower production dropped sharply, while the cold weather in winter increased electricity demand. Third, the instability of renewable energy. Although Europe has vigorously promoted the development of renewable energy, the supply of wind and solar power generation fluctuates greatly under unfavorable climate conditions, and the power generation is insufficient to meet stable demand. Fourth, the cost of the carbon emission trading system. The EU’s carbon emission trading system requires power companies to purchase permits for carbon emissions. In recent years, carbon prices have risen sharply, which has also indirectly increased the cost of electricity production.
Proposal of The Norwegian Government
The rise in electricity prices has brought extensive and far-reaching impacts on the European economy and society. Due to high electricity prices, some energy-intensive enterprises in Germany have reduced or stopped production to avoid excessive costs. The second is the increased pressure on residents’ lives. The increase in electricity bills directly affects residents’ living expenses, especially low- and middle-income families. Many people have to cut spending on other necessities to pay for electricity, and some families are at risk of power outages because they cannot afford the high electricity bills. Greek Parliament member Georgios Kirsos pointed out that “the rise in energy prices has put a disproportionate burden on low-income families.” In addition, the rise in electricity prices has further pushed up the prices of goods and services, exacerbated inflation problems, and reduced residents’ purchasing power.
As an energy powerhouse in the Nordic region, Norway has long provided electricity to EU countries through power interconnection. Electricity prices in southern Norway rose to 13.16 Norwegian kroner per kilowatt-hour last Thursday afternoon, the highest level since 2009. Faced with rising domestic electricity prices and supply pressures, Norway’s ruling party and the leading opposition party in the polls plan to cut off power interconnection with Denmark and renegotiate power interconnection with Germany and the United Kingdom.
More than 90% of Norway’s electricity comes from hydropower. The drought in the summer of 2024 has caused a sharp drop in the water storage in Norway’s reservoirs, tightening the domestic power supply. Critics believe that Norway should only export its abundant hydropower abroad if it ensures low domestic electricity prices.
The Norwegian government’s proposal has caused deep concern among EU countries, which are eager to use Norway’s abundant hydropower to stabilize electricity prices on the European continent. “This is a critical moment in EU-Norway relations. Reducing electricity ties with Europe will not be welcomed,” said an EU diplomat in Norway. EU officials believe that it is very important to establish an integrated electricity market and emphasize that Norway will also use the power grid to import electricity when needed.
Another Test for Energy Transformation in Various Countries
European public opinion generally believes that the current rise in electricity prices and energy difficulties have exposed the structural problems of European energy policy. First, it is over-reliance on fossil fuels. Although the EU has long promoted energy transformation, its reliance on fossil fuels such as natural gas is still significant, which makes Europe extremely vulnerable to geopolitical conflicts and turbulence in the international energy market. Secondly, the lack of development of renewable energy. Although Europe has made certain achievements in the fields of wind and solar energy, its infrastructure construction and energy storage technology are not yet mature, and it is difficult to meet peak demand. Finally, there are large differences in energy markets and policies. Although the energy market within the EU is nominally unified, the energy policies and infrastructure of various countries are quite different, which makes it difficult to coordinate in times of crisis.
The rise in electricity prices in Europe is not only a crisis in the energy market, but also a major test for the energy policies of various countries. From the natural gas shortage caused by the Russian-Ukrainian conflict to Norway’s export restrictions, every link reminds Europe that it needs to accelerate its energy independence and transformation. In the future, only by accelerating energy transformation, improving market mechanisms, and getting rid of energy dependence can Europe achieve sustainable development while coping with energy challenges.
