InnoBlog: Soaring energy prices signify need for innovation
In recent months, electricity and gas prices have soared. Why has this happened, and what does it mean for the energy transition?
The pandemic set-up
In 2020, the COVID-19 pandemic and associated lockdowns reduced economic activity, which constricted the demand of key commodities: in the EU alone, gas demand decreased by 3% and coal consumption by 20% from the previous year.
But as could have been foreseen, the post-pandemic economic recovery has now induced an upward surge of demand. Coupled with widespread inflation, electricity and gas prices have steadily increased throughout the summer, now hitting record highs. Behind the scenes, a number of factors are at play...
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Market design
Across Europe, the final wholesale electricity price is set by the price of the most expensive fuel needed to meet the projected demand. Due to their low operating costs, renewables - like solar, wind, and hydro - are given priority in terms of order of dispatch. Meanwhile, conventional power plants fueled by coal or natural gas have higher operating costs, incurring the respective price of fuel.
After the EU Emissions Trading System (ETS) policy was introduced, natural gas became the common marginal price setter. By putting a price on carbon, consuming cleaner-burning gas over dirty coal was incentivised. The resulting interlinkage of electricity and gas prices means that today’s high natural gas prices are the primary culprit behind the high electricity prices.
Gas in Europe
Internal EU gas production is relatively small, amounting to only 18% of total supply in 2020. And it will only continue to decline: the EU’s largest gas field - the Dutch Groningen field - will be phased out over the next few years, amidst fears of earthquakes and negative public opinion.
The EU therefore relies on imports from abroad, including pipeline imports from Russia, Norway, and Algeria as well as LNG (liquefied natural gas) imports from Qatar and the US. Typically, storage operators stock up their inventories during the summer due to lower prices. But now, ahead of the winter heating season, gas storage levels are at a 10-year low - with the high prices impeding refilling.
Across the board - from generation plants to pipelines and beyond - both unplanned outages as well as maintenance postponed from 2020 have restricted supply. Since Europe plays the role of market of last resort for LNG, higher premiums in Asia have diverted cargos away. In the pipeline gas market, dynamics are changing, too: Europe has been reducing its long term gas contracts over the last several years, and Nord Stream 2, a large new underwater pipeline which would supply gas directly from Russia to Germany, will soon be commissioned as well.
The solution: innovation
Even though we have made significant progress in decarbonising our energy system, the high electricity and gas prices underscore a fundamental truth: fossil fuels still play a leading role and set the price. But the faster we can deploy innovations and reduce reliance on external players like Russia and Algeria, we can take control of a clean future.
Accelerating innovation is at the core of EIT InnoEnergy, whether through entrepreneurial programmes in the Master’s School, investments in start-ups, or the flagship event, the Business Booster. As an alumni of the Master’s School, I can personally attest to the fruitfulness of EIT InnoEnergy’s programmes: attending ESADE Business School helped develop my entrepreneurial and creative skills, complementing my engineering background. Together with my peers, we present a new wave of talent to tackle the challenges of the energy transition - and utilise the associated opportunities.
For example, through this crisis, the prices of coal and carbon have also risen. However, the cap-and-trade scheme of the ETS is not a key factor to blame for the rising electricity prices. Instead, this market-driven decarbonisation approach is functioning exactly as it is supposed to. The growing urgency to act on climate change is pushing carbon prices up, in turn incentivising investments into clean tech - from development to deployment - rather than fossil fuels.
Implications for the energy transition
Over the past several years, the conversation around decarbonisation has focused on the supply-side: namely, increasing the penetration of renewables in the energy mix. But the upped energy prices resulting from supply-side issues have also highlighted the need to focus on the demand-side. After all, the EU’s Clean energy for all Europeans package (CEP) has put the consumer at the heart of the energy transition.
So let’s get the blood pumping and translate the buzz about energy prices into increased consumer awareness and more active engagement. Then, whether it be by choosing a new contract, switching supplier, or installing self-generation, consumers will demand alternatives, which will further drive competition and innovation. Innovation not only in the form of technological development, but also back on the supply side, in the design of new energy markets - such as for flexibility - or the redefinement of the role of energy policy - like with the upcoming Fit for 55 package.
In times like this, the EU founding principles of conferral and subsidiarity leave it up to the jurisdiction of Member States to take action to protect retail buyers against the high prices. But preventing future volatility is not an issue one MS alone can solve: it will require talented thinkers and international teamwork coming together to innovate and secure Europe’s green energy future. An EIT InnoEnergy programme can prepare you with the interdisciplinary innovation skills to make it happen. Applications just opened, so apply today!
By Emilia Chojkiewicz, EIT InnoEnergy Master School student
