Filenews 24 May 2022
By Javier Blas
An oil crisis hits the economy like a big wave that pops up on the beach: the impact is immediate and dramatic as the peak of the wave sinks to the shore. An electricity crisis is another kind of shock: it looks like an up-and-coming tide, it is slow but relentless and then - surprise! - you are overwhelmed.
This difference explains why policymakers and investors focus on oil and tend to ignore electricity. This is a big mistake because we are facing another crisis over electricity prices, no different from the one that hit Europe at the end of last year.
Silent toss
Almost quietly, electricity futures for the entire Old Continent in terms of the end of 2022 and especially in 2023 have seen a significant increase in recent weeks, heralding further increases in utility bills.
In some cases, futures contracts have hit record highs, having increased by about 40% in the last two months.
Electricity prices soared in December and again at the end of February for a few days. Since then, current prices have receded. Their downfall is deceptive. In electricity, what matters is the cumulative averages. These monthly averages paint a worrying picture.
So far in May, the German one-year electricity reference contract was on average at 222 euros per megawatt hour, heading towards its highest monthly level in history, above the previous record set last December, at 207 euros per megawatt hour. Before 2021, the highest average for the same reference contract was 83 euros in July 2008.
The shock of electricity
War and "nuclear" France
The war in Ukraine, which caused gas and coal prices to soar, is the main source of this crisis.
The latter is also exacerbated by the low production of nuclear power in France: the state-owned Electricite de France (EDF) has recently reduced the prospects for its nuclear production for 2022 to less than 300 terawatt-hours, which is more than 30% compared to the amount it produced a decade ago.
European utility companies buy electricity months ahead of the wholesale market to determine costs for their customers. Thus, the current price increases in futures contracts essentially herald significant increases in retail prices for next year.
The increase will be similar to that of last autumn, when electricity bills became a hot political potato from Spain to the UK.
Subsidies and dissatisfaction
Once again, the increases may force governments to spend billions of euros to mitigate the impact, through subsidies and tax breaks. The problem now is that the increases in utility bills will come on top of widespread discomfort about the increased cost of living, further burdening family budgets.
This is a bigger problem for the European Central Bank (ECB) and the UK Central Bank (BoE), which are already battling the highest inflation in decades. If the oil shock caused a wave of inflation, the "electric" shock will further elevate the inflationary tide.
With oil, spot prices in the market make pump prices fluctuate on a daily basis. With electricity, the changes are revealed on a monthly basis - and will be particularly dramatic in the future.
In the UK, for example, the maximum price that utilities can charge households for their electricity - popularly known as the upper price cap - is calculated and adjusted twice a year. Because prices in late 2022 and early 2023 have been trading at high levels for several weeks, the cap is expected to rise significantly.
Cornwall Insight estimates that the combined limit for electricity and gas bills is likely to rise to £2,595 per year by October, more than 30% up from £1,971 today. Earlier this year, the same threshold was raised by 54% before the British government intervened to mitigate the blow to consumers.
The trends are similar in other countries. German utilities and major electricity buyers are now negotiating electricity for delivery throughout 2023 at more than €200 per megawatt hour, which is a high for that year. To understand what this means in comparison, futures prices in 2019 were around €50.
French electricity futures prices for 2023 rose last week to more than ,4300 per megawatt hour, a record high for that contract. In January the same contract was negotiated under €130 per megawatt hour.
The impact of these increases will not be evident on retail prices until later in the year. But when the electricity market reaches the tide in late 2022 and early 2023, the impact on families and small businesses will be the same: many of them will be "drowning".
Source: BloombergOpinion
