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What is behind the extreme price of electricity on the market?

Jamie Cameron
28. 8. 2022
4 min read

I became interested in this topic especially with the current astronomical electricity prices, which we can follow on the European Energy Exchange (EEX). I am quite surprised that the Czech Republic has been suspiciously quiet on this topic so far, as it will also affect us directly. So what is behind the current extreme prices on the electricity market?

The clouds are gathering more and more every day

The energy market

The first thing to consider is how the electricity grid actually works. Consumption cannot be accurately predicted in advance, so generation is constantly being adjusted accordingly. In our country, this is regulated by CEPS (Czech Electricity Transmission System), which instructs certain power stations to increase or decrease their output. These tend to be gas or coal-fired power stations, which are idle for most of the year because of their expensive operation.

The ones that are most used to generate electricity are those that produce it cheapest, which are solar, wind or nuclear. With nuclear, of course, the cost of building them is a very expensive proposition, but here it is a price proposition. When there is demand that cannot be met by these plants, coal or gas plants are the ones that start to be used until there is not enough electricity. If anyone is more interested in this issue, there is a wikipedia entry for it in English "merit order". The price is then set by whichever source is used last in the order (gas, coal).

price growth per 1 MWh in two months, source: kurzy.cz

Cause of the problem

The output of nuclear power plants is currently small. This is due to problems from Germany and France. For Germany it is a political decision as they do not consider it a safe source of energy. According to the first reports, all their plants were supposed to shut down, but in the end they will probably keep the last three plants running. In France, they are struggling, as is the case throughout Europe, with drought. We know that running a nuclear power station consumes large quantities of water, which is used to cool the reactors. It uses mainly water from French rivers, which are in short supply because of the drought. Another shortcoming is the corrosion of key components in the plants. For these reasons, 32 of the 56 reactors are currently out of action, i.e. more than 57 %. The drought also affects the output of hydroelectric power stations and, in addition, there is generally less wind in summer, so the output of wind power stations is also reduced.

Another reason for the extreme price of electricity is, of course, the price of gas, which is caused by Russia and its aggression towards Ukraine. The record price of gas is therefore making the already expensive gas-fired power stations considerably more expensive. These are being used extensively in Germany, which is screwing up the overall price per MWh of electricity. Germany is also supplying France with electricity it lacks through reduced output from its power stations. This is another piece to the puzzle.

Gas price growth over the last three months, source .

How to get out of this?

The answer is not simple. A massive restart of nuclear power plants in Germany would certainly be an option, but that is far from happening under the current political set-up. I can also think of a move away from dependence on Russian gas, more massive construction of renewable energy plants, or a reduction in demand for electricity. Unfortunately, these are all complex and long-term solutions that are difficult to implement within a few months.

In your opinion, is there any other factor that plays an important role in this issue? What solution do you think would be best in the current situation? I will look forward to the answers in the comments 😁

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