The price of CO ₂ doubles in a year and threatens to raise electricity

The price to pay in Spain for electricity is back in the news one more day. After having reached yesterday the wholesale market a historical record, standing at 122.76 euros per megawatt-hour, today there is a decrease of 3.1%, placing the price of electricity at 118.99 euros MW / h. That amount represents the second highest cost achieved so far in electricity in the historical series. Behind are the 117.29 euros of August 13 and the 117.14 euros of August 20. The wholesale cost of electricity will oscillate this Friday between a maximum peak of 125.33 euros at 1 in the morning and 106.75 euros at 6 in the afternoon.

The causes of the rise in prices, in addition to the heavy tax burden, are fundamentally two: the price paid for polluting in Europe, that is, the so-called CO emission rights.₂ and natural gas, one of the fossil fuels with which energy is produced and which is also reaching a high cost. It also emits carbon dioxide, like coal, and has to pay the emission fee imposed by the European Union in the midst of the struggle for decarbonisation.

Electricity companies acquire rights in order to pay for polluting emissions from their plants, whether gas or coal. Subsequently, these costs are transferred to the price of the electricity they sell on the wholesale market. These CO2 emission rights are listed as futures and are part of a market that the European Union created in 2005. Since then, the price of these has been increasing. Before the COVID-19 pandemic, the coal emission contract was around 20 euros, in December 2020 it exceeded 35 euros for the first time. In this month of August and specifically in recent days, it has reached 60 euros, specifically 55.72, per ton of _CO2.

Decarbonisation by 2050

The EU is firmly committed to full decarbonisation by 2050 and this explains the unprecedented rise in the cost of _CO2 emissions. The EU Emissions Trading System (EU ETS) is one of the cornerstones developed by the governments of EU countries for the fight against EU climate change and an essential instrument to reduce greenhouse gas emissions economically effectively. It is the world’s largest carbon market and the largest.

As experts have told elEconomista, “this market works according to the principle of “limitation and trade”. A maximum limit is placed on the total amount of emissions that can be emitted by the installations covered by the scheme. The limit is lowered over time to reduce total emissions. Below the limit, facilities buy or receive allowances with which they can trade with each other according to their needs. The limit on the total number of rights available ensures that they have a value.”

They also add that “at the end of each year, the facilities must deliver sufficient rights to cover all their emissions, and otherwise heavy penalties are imposed. If it reduces its emissions, the facility can retain its surplus rights to cover its future needs or sell them to another facility that doesn’t have enough.”

Thanks to the decisions taken by the European Union, it has been possible to encourage consumption and investments in renewable energies. However, this increase in CO prices₂ is not harmless, since it increases the costs of the companies that must acquire them and, therefore, the final cost of the product for consumers, as has been happening so far this month with the price on the electricity bill of many households.

Gas will rise in 2022 up to 50%

The energy transition is causing a perfect storm in energy costs. Gas futures prices for 2022 are 50% above those registered at this time for 2021, which is a problem for a good number of companies that have to close budgets and are now afraid to sign supply contracts for next year. Gas prices have increased by 50% for the rest of the year and by 20% for the next.

Source: The Economist