Why will electricity prices continue to rise?

Soaring electricity prices have been in the news for months now.

Since July, when the previous January 2012 record-high wholesale cost of €103.76/MWh was first broken, electricity prices have made headlines 19 times in Spain — and are likely to remain in the spotlight at least into the near future. 

One day in early September saw a 7.5% price rise in just 24 hours to €152.32/MWh before rising by 33% a week later. The shock of this wore off quickly as slightly over two weeks ago households experienced a 26% increase in one day, with electricity peaking at €288.53/MWh. 

Low natural gas reserves, which have been attributed to geopolitical unrest between the EU and Russia, and are needed to power combined-cycle plants, as well as an overreliance on more polluting electricity sources — only 19.8% of Catalonia’s electricity came from renewables in 2020 — are largely behind this increased market volatility.  

Catalan News spoke with Ana García, who presides over the Economists Association of Catalonia’s Committee for the Economy and Sustainability to learn more about this situation. 

Why are electricity prices rising?

The increasing trend of electricity prices is happening across Europe. CO2 emission fees in the European market have increased considerably over the last year. We have, as well, high natural gas prices on the international market [and electricity prices are also a] consequence of the shortage of reserves.

There are geopolitical reasons, market reasons, and so on [for price hikes]. Since we started the normal [post-Covid lockdown] economic activity, demand has increased considerably.

How does Spain’s electricity market work? 

In Spain, we have two tariffs. One is the regulated tariff, the PVPC, with more than 10 million consumers. And then there are more than 17 million consumers that are in the free market. 

What is happening is that because of the high fluctuation of the prices, the consumers that are suffering are the tariff-regulated prices, so it means more than 10 million consumers. The other 17 million that are in the free market pay an agreed price for electricity. We will see in the future if rising prices will have an effect on those consumers when they need to renew the contract with the company.

How long can we expect this situation to last?

Unfortunately, the high prices that we are living and we are suffering since weeks ago in Europe, the forecast is that they will continue to be high. We can expect high prices until at least January 2022 to March 2022. This is a consequence of the high prices of natural gas and the shortage of reserves.