By now, it should be known even to first graders how dependent Europe is on gas and other commodities. But besides the quickly changing gas and coal prices, European power prices will also be strongly influenced by the weather. When comparing the effect of 40 historical weather years, we find that the number of hours with prices above 500 or even 800 EUR/MWh differs strongly from year to year and hence depending on the year´s weather. The following figure shows the number of price spikes in France and Germany in the year 2023, given different historic weather conditions.
Price spikes can occur because of ramping and start-up costs or can potentially even indicate security of supply challenges. In these high price hours, the income for generators with low costs is extra high, as gas or demand response are most likely setting the prices. This is the reason why the EU Commission targets these high price hours with measures for demand reduction.
To further analyse the severity of security of supply problems, we also looked at the utilisation of gas-fired capacity in both France and Germany. Gas will be the most expensive power generation technology in 2023. Thus, if these plants run at 100 percent of available capacity, one could argue that one has no other option to supply the market with other electricity. As for France, gas units are fully utilised in around 20 hours in 2023. German gas capacities are never fully utilised, indicating some slack in the system. This indicates that the French system is currently much tighter than the German one. In France, the situation is a result of the reduced nuclear availability. The results on security of supply are only indicative, and a full security of supply analysis would also need to involve detailed grid modelling.
To counter this high demand for gas, and the subsequent high electricity prices, the EU Commission proposed and passed four regulations, of which two are relevant for this analysis:
- Reduced power consumption. The commission mandates to (i) lower power demand by 5% in every day´s 10% most expensive hours and encourages (ii) to lower overall power demand by 10%. We will analyse the effect of both measures on gas consumption and power prices.
- Redistribution of extraordinary income from the power sector: The Commission proposes to collect excess profits from so-called inframarginal generators that are price-takers in the market. Specifically, the proposal introduces a temporary income cap for these generators equal to 180 EUR/MWh. We will analyse the available income per country under different demand reduction scenarios.
- Redistribution of extraordinary income from the oil, gas, and coal sectors: Not relevant for this analysis
- Extended possibility to protect small and medium-sized enterprises: Not relevant for this analysis
To learn more about the EU´s proposals, have a look at our recent blogpost explaining its details here.
We find that demand reduction can indeed have a large effect both on prices and on gas demand. First, prices decrease significantly in the most expensive hours of the day under the “peak price demand reduction” measure, as mandated by the EU. This can be seen in the next figure.
However, overall average prices are not affected strongly by this. The average price reduction is comparable to the effect of an overall demand reduction of 1 percent. A 10 percent demand reduction would have stronger effects.
Gas demand would also fall most strongly in the case of a generally high power demand reduction across the year. This underlines and shows that gas is used not only in hours of peak electricity demand, but in many hours across the year. France´s gas consumption for power generation for instance, would decrease by 50% in the case of a general power demand reduction by 10%, as gas is often used at the margin. Demand in Germany would also decrease drastically. Other countries which would save a lot of gas are Spain and Portugal.
The funds available from the redistribution measures would be mainly available in France and Germany and shrink considerably with the introduction of more power demand reduction measures. The EU commission arrives at roughly similar numbers like ours, with an estimate of 25 billion EUR in December 2022 and Q1 2023 published by the EU Commission in their fact sheet accompanying the proposal, and of EUR 117 billion for the entire year. Thus, our estimates are in the same ballpark, especially since our estimates do not account for long-term contracts. Whether all of these funds will become available or not remains to be seen, as it is, for example, unclear what will happen to RES generators operating under feed-in tariffs. The following graph shows the distribution of revenues across Europe in the Base scenario for 2023.
If you would like to learn more about our analysis of the next developments of the European power system, join our webinar on November 10th at 10am. We will also dive into the recent German plans to collect revenues from inframarginal generators just a bit above their LCOE.
