2021 closed with the highest electricity prices in the history of Spain. In recent months, the price of MWh has become a fixed figure on the news. However, nobody remembers the average price of a year ago: €28.5/MWh in February 2021. So, it was not news.
One should rather speak of the highest electricity prices in European history, since it is a pan-European phenomenon. In 2021, wholesale electricity prices in the European Union (EU) soared with most countries experiencing record levels in the final stretch of the year. Behind this sudden increase there is a combination of various structural, circumstantial and fortuitous factors.
Between the structural factors, many analysts include the marginalist mechanism of price fixing in the EU and the limited room for maneuver of a poorly integrated electricity market.
To all of these are added fortuitous factors as the lack of wind in Europe for many weeks in a row or the stoppage of a third of the nuclear reactors in France following the discovery of a potential problem in its facilities. In mid-December 2021, 17 of the 56 French reactors were stopped, forcing the highest levels of electricity imports in French history and putting interconnections with neighboring countries to the limit.
Average monthly wholesale electricity prices
Crises, the ones from before
The most doomsayers are already talking about an energy crisis and some dare to predict that we are on the verge of an economic crisis comparable to that of the 70s of the last century. The increase in electricity prices in Europe would be only the tip of the iceberg of the shortage of energy supplies worldwide. The data, however, do not support such claims.
Neither oil nor natural gas are at historical maximum prices. Both are a long way from the highs reached in 2008, just before collapsing due to the economic crisis triggered by the financial crisis. And they are also far from the highs of the last decade.
Although it is true that since March 2020 fuel prices have been showing an upward trend, accompanying the economic recovery and the cut in Russian supply (25% less to Europe in the fourth quarter of 2021 compared to the same period in 2020), the current level of fossil fuel prices does not invite us to think of a global energy crisis.
International prices of natural gas (left axis, green) and oil (right axis, blue) 2012-2022
The risk is in the oil
But could escalating electricity prices cause an economic crisis of the proportions of the oil crisis 50 years ago? The answer lies in understanding the structure of energy consumption.
Although we have the feeling that electricity is the main form of energy we use and on which we depend the most, the truth is that it does not reach 20% of final energy consumption, compared to the 40% that oil continues to represent.
In 1973, when oil prices spiked, triggering the worst economic crisis of the second half of the 20th century, oil accounted for almost half of the world’s final energy consumption. That is why the rise in the price of oil-derived fuels continues to be, even today, a strong destabilizer of economies (for a sample, see what is happening in Kazakhstan).
We should talk about electricity crisis in Europe instead of talking about energy crisis. Just as we should refer to the rise in the price of electricity instead of the rise in the price of energy, as the media does on a daily basis. The price of electricity does not generate riots or paralyze economic activity in Europe (yet).
Final energy consumption by source, 1973-2018
I am aware that a good part of the readers will find these disquisitions trivial compared to their electricity bill. What they want to know is whether or not electricity will continue to record highs in the coming months. It is difficult to guess since the structural, temporary and fortuitous factors that we have already listed are still in operation.
If the winter is cold, prices will continue to be high.
If the wind doesn’t blow, too.
If Russia invades Ukraine, the price of gas will go up.
If the price of gas in international markets continues to rise, electricity prices will undoubtedly reflect it.
If more French reactors have to go into unscheduled shutdown, European interconnections could reach their limits and force blackouts in France and, in turn, push prices up across Europe.
But at the same time, spring electricity demand is less than winter and sea routes are crowded with ships gas filled for Europe. The worst weeks may be behind us.
Faced with this scenario, many voices advocate that Spain gain energy independence when the country is practically an electrical island.
The European Union recommends that the minimum interconnection capacity between countries be at least 10% of the generation capacity installed in each of them.
Spain is the only country in continental Europe that does not reach this threshold (international electricity exchanges in 2020 did not reach 3%).
Having more and better access to the European electricity system, one of the most robust and secure in the world, increases the security and continuity of supply. In addition, it increases the efficiency of interconnected systems, taking advantage of the cheapest generation available, by allowing energy to be transported from where it costs less to where it is more expensive. It also increases competition, as energy imports from other countries require agents to make more competitive offers and get them accepted, which brings with it a reduction in the wholesale price of electricity.
Given all of the above, interconnections play a key role in the integration of electricity markets and will be one of the ways in which electricity prices will return to normal in the future.
In the most immediate, in the remaining weeks of this winter, it is likely that specific historical highs will be observed again in wholesale electricity prices in Spain and Europe. But, also, the worst of this price crisis could have already passed.
In any case, the data available on prices and the structure of current energy consumption rule out that we are heading, in the short term, for a global energy crisis in the style of the 1970s.