An explanation of the fast rising energy rates

6m

The energy market developments have been extreme for several months now. In August 2021, the gas and electricity market has started to increase. At present, global natural gas shortages and the war in Ukraine are maintaining the high prices.

How is it possible that prices have risen so quickly in 2021?

There are a few reasons for this, but the main factor is a shortage of natural gas in Europe. The fact that stocks are so low is due to reduced supplies from Russia in particular, but also due to reduced supplies of LNG. In Asia, people were willing to pay much more for gas for a long time, which has resulted in a lot of global gas transport in that direction resulting in shortages in Europe. In addition, last year we had to deal with a relatively cold winter and a cold spring. As a result, gas consumption for heating houses and other buildings was considerably higher. Because there was a lot less wind, more gas has been used to generate electricity.

Normally, the replenishment of gas stocks already starts in April, but due to the rising prices and little supply, this started later last year and the replenishment is much slower, with the result that we have to deal with a much lower level this winter. Fortunately, we had a relatively warm winter, which meant that the gas stocks declined less quickly. Globally, however, there remains a shortage and in addition, stocks have to be replenished for the coming winter, thus maintaining the high prices.

Developments in 2022: war in Ukraine

As a result of the above circumstances, we have had significant increases in energy prices for some time now. Unfortunately, at the moment there is also the terrible war between Ukraine and Russia. In this tense situation, it is uncertain whether Russia will continue to supply natural gas to Europe, which depends for 40% on Russian gas.

This combination of dependence and concerns about whether or not the gas supply will be cut off results in great uncertainty in the markets, resulting in even higher prices that also fluctuate strongly from day to day. For example, on March 7, 2022, the gas price shot up by 70% to a new record of €345 per MWh, while the price was still €50 per MWh at the beginning of December.

Whether Russia will actually turn off the gas tap depends on the course of the war. It is not inconceivable that the cessation of gas supply will follow as a reply to sanctions from the West. However, this also affects the Russian economy, because the export of gas and oil to Europe accounts for 60% of Russian earnings. As a result, there is hope that Russia will not stop gas supplies.

Can’t the gas come from somewhere else?

Despite rising prices, we were fortunate to have had a relatively mild winter. For the time being, it is not expected that there will be an immediate gas shortage. Should Russia turn off the tap, there are a few options.

There is sufficient gas in the Dutch province of Groningen, but because gas extraction here is being phased out (with good reasons), this is not an immediate solution. In addition, America offers liquefied gas, also known as LNG (Liquefied Natural Gas). This has the advantage that the proverbial ’tap’ cannot simply be turned off. However, there is a lot of competition, because most of the liquid gas goes to Asia. At the moment, we are also not yet able to fully meet our needs in Europe with the use of LNG.

It will therefore become very important to save as much energy as possible, so that demand falls. In addition, we need to accelerate the sustainability of our energy supply, so that we need less and less gas as an energy source.

Where does our gas come from?

Given the situation between Russia and Ukraine, we understandably receive questions about the origin of the natural gas we supply. As a collective we do not have any agreements with Russian parties. We purchase the natural gas that we supply on the Dutch trading market. Ordering and payment of this is done via the Dutch network operators. The supply and distribution of natural gas through the Netherlands is provided by, among others, the Nederlandse Gasunie.

By actively developing and generating sustainable energy as a collective, we aim to be self-sufficient. We therefore see the supply of natural gas as a temporary but necesarry service until gas is no longer needed. We therefore hope that current developments will accelerate this transition.

Why is the high gas price driving the rate of green electricity up?

The price of green electricity is rising, because a relatively large amount of electricity is still being generated by gas-fired power stations in the Netherlands. Due to the high gas price, the cost price of generating electricity is high and because the price of green electricity is still linked to this, we also suffer from this with our own green electricity. It is true that the electricity we supply comes from our own projects, but developments in the energy markets still affect the rates. There are a number of reasons for this:

1. Market prices for electricity are determined by the cost price of the electricity producing installations

The wholesale electricity market is simply a market of supply and demand. On the supply side there are various options such as sun and wind, but unfortunately for the most part this is made up by coal and gas-fired power stations. The extent to which the various sources have a share on the energy grid ultimately determines the rate at that time. If there is a lot of sun and wind generation available with moderate demand, then the prices are low. Because you do not need raw materials for the production of energy from sun and wind, as is the case with coal and gas-fired power stations. An increase in the raw materials of these last two forms of generation therefore affects the electricity prices on the wholesale markets.

2. Subsidies on sustainable projects are linked to market prices for electricity

Solar and wind projects (still) receive subsidies to make the projects profitable. The amount of this subsidy depends on the average wholesale price of electricity during the year. In concrete terms, this means that a subsidy is paid on top of the average wholesale price, because the government assumes that you will receive that average wholesale price for electricity production. The subsidy then tops up to the maximum amount that has been awarded for that project. Incidentally, these maximum amounts have become less and less in recent years, because projects can be realized at increasingly lower costs. Due to this subsidy system, in a rising market, more has to be paid for the generated electricity.

3. Production and purchase are not simultaneous

The production of sustainable electricity and its consumption are never 100% simultaneous, which means that these profiles must be made equal. This also partly runs through the energy market. Effectively, this usually means selling at lower rates and purchasing at higher rates. At times when there is a surplus of sustainable generation, the rates are low and when there is a lack of sustainable generation, the rates are higher because of production via more expensive power stations.

However, this does not mean that the electricity supplied is not sustainable, because on balance we never supply more than we generate with our own sustainable projects.

Consequences for the installment amount

Households with a fixed supply contract will not (yet) notice the increases until their contract ends. Households with a variable contract unfortunately have the consequences of the increases.

From 1 January, the government has provided compensation for the extreme market increases in the form of a reduction in the energy tax for electricity and an increase in the tax credit on electricity. For gas, the energy tax will go up slightly again.

When will the rates fall again?

Before the war broke out in Ukraine, energy prices were expected to fall after the winter. However, due to the outbreak of war and increased uncertainty about future gas supplies, prices have exploded and the market is once again highly volatile. Depending on the outcome of the conflict in Eastern Europe, energy prices could still fall later this year, but the general expectation is that prices will remain at a relatively high level until the spring of 2023. Whether and how much the tariffs will fall will depend strongly on the state of gas supplies and developments in Eastern Europe. As soon as it is possible, we will reduce the variable rates in the interim.

What else can you do to keep costs down?

Of course, the most sustainable and cheapest energy is the energy you don’t use. Therefor try to pay extra attention to your usage this winter and try to make sure you don’t use energy unnecessarily. We have gathered some easy tips that will help you with this.

10 simple tips to save energy:

Install radiator foil to keep the heat that is generated from your radiator inside your home instead of leaving through walls.

• Set your central heating to 60 degrees Celsius. In general, higher is not needed and in most cases you can easily adjust the temperature yourself.

• Take a short shower with a maximum of 5 minutes. A household that showers 5 minutes instead of 9 will save about 15.000 liters of warm water and 60 m3 gas in a year.

Only heat the rooms you use and make sure to keep doors closed.

Ventilate well. A well ventilated home is less humid. The air in a less humid home is more easy to heat and will save you money in the end.

Insulate and install draft strips. These can be found at your local construction market and provide a quick way to keep the cold outside.

• Make sure to only use LED lighting and stay away from old fashioned light bulbs.

• Make sure that sunlight can enter your home. The sun is a free heating source. During the day, therefore, let in as much sunlight as possible by opening your curtains or other blinds.

• Do not put large furniture in front of your radiator. If you block your radiator, the heat cannot reach the room properly.

• Curtains are good insulators. If your radiator is under the window, make sure that the curtains do not completely cover the radiator, so that the heat can freely enter the room.

Would you like to save on energy, but don’t know how? Our local energy cooperatives are happy to advise you on measures to make your home more sustainable. Check out https://www.samenom.nl/diensten-en-services/ to see which cooperatives are located in your area and which services they offer.