Electricity prices are going crazy. Market participants obviously fear that towards the end of winter there will not be enough electricity to fully cover demand. So that it doesn’t come to that, all consumers should be more aware now that saving is financially worthwhile.
The Zurich Prime Tower in the corona lockdown with home office obligation: turning off the lights would now be more lucrative than ever.
Once again, something is being put to the test that we have previously taken for granted. This time it is the safe and relatively cheap supply of electricity.
The price for electricity delivered the next day in Switzerland or Germany has increased around tenfold on the free market since the beginning of 2021.
An important signal
Electricity is a common good; every megawatt hour traded on the market at a certain point in time costs the same amount. The price is always the one that just barely matches supply and demand. As demand increases and supply decreases, it gets higher. In Europe, electricity has become so much more expensive in recent months, mainly because the last part of the demand is met by gas-fired power plants and Russia uses natural gas as a weapon and drives up its price. At the same time, the supply of nuclear power has also fallen due to French plants that have been shut down and are being overhauled.
The electricity traded on the futures markets has become even more expensive. A megawatt hour, which has to be delivered in the first quarter of 2023 (i.e. towards the end of winter), cost around 1200 euros in Germany at the end of last week, 1700 euros in Switzerland and as much as 1900 euros in France. In the case of Switzerland, the CHF 1,000 that this electricity costs more than today is a kind of scarcity signal and risk premium.
The price premium shows how much the electricity market participants fear that there will be a shortage in the first quarter of 2023, in which the electricity supply will no longer fully cover demand. These fears are obviously high at the moment.
The extremely high prices are an important signal to reduce the demand for electricity and thus prevent a shortage in which electricity would have to be rationed and there would be much more devastating power cuts.
In the coming winter, it will hardly be a matter of suddenly having to cut power consumption in half. It is important to avoid overloads that are distributed differently over time. If the market mechanism is allowed to function reasonably freely, it can achieve this.
Consumers should feel it now
So far, this hasn’t worked properly because most electricity consumers hardly notice it. They have not yet adjusted their demand, which is causing the electricity price on the futures market to continue to rise in panic.
What is needed now is a heightened awareness of the problem. Large consumers actually already have the incentives to do so. Because if you have stocked up on electricity on the futures market in good time and are now saving, you can in principle sell the saved consumption for around ten times the original purchase price.
Unfortunately, many suppliers have fixed prices with major customers, but not fixed quantities. This makes it more difficult to negotiate lucrative contracts for savings. And the many SMEs and private households that pay administratively fixed unit prices in the protected market only notice something of the electricity shortage when the next annual tariff adjustment is made.
there would be solutions. Electricity suppliers just have to be a little more innovative (and the legal requirements give them the necessary leeway). Anyone who now commits to reducing their average consumption next winter should be rewarded with an attractive bonus by the suppliers. After all, most suppliers can turn the expected savings in electricity trading into money. If customers still consume more, they should be able to be fined accordingly.
If the market is allowed to play harder, it is very likely that there will be no electricity crisis at all and the extreme price fluctuations will soon become somewhat smaller again. But to do this, saving electricity must first of all be more profitable for as many people as possible.