Electricity becomes up to 50% more expensive in 2022 due to the price of CO ₂

The energy transition is causing a perfect storm in energy costs. CO2 emission rights have doubled _{their price to over 50 euros per tonne and have generated an increase in the price of electricity and natural gas throughout Europe that poses a risk to recovery.}

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 the next year.

According to Kepa Solaun, founder of Factor, a specialist in emissions trading, what is happening “is a combination of factors, but the most important thing is the increase in European ambition on climate change, together with a context of enormous liquidity and low rates, which makes many investors see the right of emission as an interesting asset in the long term”.

This sharp rise in _CO2 rights has been transferred to electricity prices that are reaching record levels in June and that can take us to the summer with the most expensive energy in history.

The prices of electric futures continue to mark in Meff Power very high levels for this time of year, above 90 euros / MWh. This represents a rise of around 20 euros in the last two months, although they have begun to relax after the announcement that the Government is considering taking measures.

Natural gas prices, on the other hand, have followed the same line and have increased by 50% for the rest of the year and 20% for the next, according to Javier Revuelta, senior principal of Afry.

Perfect storm

Europe has experienced an abnormally cold quarter that has led to increased demand for gas. At the same time, combined cycle generation has increased thanks to the displacement of coal caused by _{CO2 prices.}, which has moved quickly to the electricity markets that continue to depend significantly on the prices of gas and, to some extent, oil, which has also reached $ 73 per barrel and also significantly increased the price of fuels on the poles of service stations.

In the last 15 days, the trend of gas prices in European hubs has been on the rise due to the increase registered in the Asian JKM that has returned to 30 euros / MWh and that can cause price arbitrages, as happened in January with Filomena.

As for supply, Norwegian flows have suffered significant decreases while russians remained stable, as well as Algerians in the Case of Spain. Supply shortages provided another additional bullish support and have prevented declining demand from the arrival of summer from relaxing prices.

Gas is one of the main production costs for hundreds of paper, steel, ceramics, chemical, refining industries competing in global markets.

According to Verónica Riviere, president of GasIndustrial, “European competitors enjoy much cheaper final prices, which generates a huge competitive disadvantage that in recent months has increased as the price has skyrocketed even more. The gap between prices in Spain and in European countries has widened with this fierce rise in the price of gas. And to this increase in energy costs above the direct competitors of France, Germany or Italy, we must add what the contemplated contribution to the Sustainability Fund will entail, a forced contribution that comes at a time when it is still unthinkable to have the option of replacing this gas with an alternative one in conditions of efficiency and competitiveness. A panorama that leads the industry towards a greater loss of competitiveness, increasing the gap and the differential with its competition”.

For this reason, the association does not hesitate to ask the Government to be aware of “the need to accompany the industry in decarbonization with an industrial transition that enhances competitiveness not penalizes it. In the current moment of industrial transformation, measures that affect competitiveness must be avoided.”

In a similar situation are the large consumers of electricity. According to Fernando Soto, general director of AEGE, “any rise such as those that, unfortunately, are occurring in recent months due to the impact of the rise in gas and _CO2 speculation, is a blow to our competitiveness. If we add this to the structural increase in electricity prices in the face of competition from Germany and France -where the industrial consumer has an advantage of more than 20 euros/MWh with respect to Spain-, the photo is a structural disadvantage for Spaniards that is due to the differential of regulated costs, fees, taxes and compensations compared to those of these competing countries. It is true that the price of _CO2 is having an impact throughout Europe, but here this escalation is aggravated by the production tax, 7%, which is transferred directly to the market price, and by insufficient compensation of indirect _CO2 for the industry. ”

For this reason, the representative of these large consumers is clear about the way. “In this great storm some clearing appears. Last Wednesday, the fourth vice president announced in Congress measures that will relax the impact of the high electricity price that consumers suffer: action on fiscal measures, such as those adopted in 2018, in clear allusion to the production tax and, for the industry, an increase of 100 million in the compensation of CO₂ indirect. It is a step in the right direction and a sign of the Government’s sensitivity to the electro-intensive industry. We encourage the Executive to follow this line of action by emulating the measures already enjoyed by our main competitors, to improve our competitiveness in the cost of electricity supply”.

The impact of these strong increases also reaches small and medium-sized enterprises. In the opinion of the Association of Electricity Consumers, an organization that represents more than 25,000 SMEs, its director, Francisco Espinosa, explained that “fortunately, throughout last year, most of our associated companies made price coverages for this year in the environment between 40 and 45 euros. The possibilities of closing a fixed price for 2021 were well exploited at the time. Our biggest concern is focused on the prices we see for 2022 above 60 euros. The alternative is long terms, where there are opportunities to improve costs, but this modality clashes with the uncertainty of the economic recovery and the stability of our own consumption in the future in the medium term”.

Faced with this scenario, Espinosa asked the Executive “not to touch the market. Any intervention in the functioning of the OMIE market would be counterproductive, and would alter a competitive and marginalist system that will be increasingly necessary in the immediate future. We believe that we must influence the real benefits of each of the producers, not the technologies. The Government must analyze in great detail the benefits of the companies that own production plants and act on their increase, regardless of the technology. In short, more surveillance of profits and less intervention in the markets.”

Source: The Economist