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Tuesday, November 29, 2022

Electricity prices today and tomorrow

By: Dr Mitja Steinbacher, Dean of the Faculty of Law and Business Sciences

Information is a fundamental factor in the functioning of international commodity markets, such as the electricity supply and demand market. In the recent period, we have witnessed significant media predictions of electricity price increases.

The prices valid at a given moment in the international stock exchanges contain various information from buyers and sellers, including their expectations about all possible factors that could affect future prices. Stock market prices are usually isolated from media announcements, which are a less important factor in the formation of stock market prices, simply because a media release of a piece of information usually contains little of new relevance that stock market traders would not already know. Market traders have much better information about stock market goods than the media. The stock market is a source of information for journalists rather than the other way around, who then transmit this information in a processed form to the general public. Media announcements can be a factor in the formation of final sales prices for end customers, which are formed after the international exchange price is already known and after the deals have already been concluded. Such information can be a particularly strong driver of final prices when it contains the predictions of policy holders regarding the regulation of final prices.

Regulation in a small open economy, such as the Slovenian one, does not change stock market prices, but it can change the final retail price of domestic customers and, in extreme cases, it can also be administratively limited or even determined. It seems as if the holders of political powers by implementing price regulation are not sufficiently aware that there are many effective protection mechanisms on the stock market against price fluctuations and that the final distributors of electricity, including Slovenian ones, are in the interest of the stability of retail electricity prices to end customers, as this enables them to conclude long-term purchasing contracts and strengthen their market share. End sellers are also reluctant to take price risks, as their nature of business is different from stock traders who live off price risks. End sellers know ways to protect against stock market risks and use them regularly. As a result, the final prices of energy products for consumers rarely change, despite sometimes significant fluctuations in stock market prices.

The electricity market has recently received a lot of attention from politics and the media. The reasons lie in forecasts of a stronger increase in electricity prices for European households and businesses in the last quarter of 2022 and the beginning of 2023. Let’s look at some data on the prices of some energy sources on the stock market. The largest amounts of leased capacities of the German power grid for the last quarter of this year were done at a price of around 460 euros per megawatt hour, and a tenth of the leased amounts were done at around 600 euros per megawatt hour. Leased French sources of electricity for the next quarter were slightly more expensive, while data on the realised price of Slovenian sources of electricity for the next quarter could not be found on the German stock exchanges. The offered prices of Slovenian electricity sources for the next quarter are on the same level as Czech and Italian sources, but they are sold at a slightly lower price than German ones. It should be said that the stock market prices of electricity have increased significantly already in 2021.

The final prices that will be paid by consumers in the future period will presumably depend on the success of purchasing electricity sources from electricity traders in different markets within the single European electricity network. So, they will be a kind of weighted average of the prices of different sources, as is the practice already. The selling price of electricity represents approximately 40 percent of the final price on the bill. Converted to the current kilowatt-hour price in our country, for the first quarter of 2023, without a reduction in network fees, taxes, and excise duty, we can expect an approximately one and a half times increase in the electricity bill.

Bottom line: the reasons for this current increase in prices on the international electricity exchange in Europe are related to uncertainties regarding the ability to produce electricity in Europe, partly due to disruptions in gas supply and partly due to increased demand for electrification, especially transport. At the same time, it should be remembered that Ukraine’s connection to the European energy network provides access to cheap electricity from their nuclear and thermal power plants, which will alleviate these price pressures in the short term. For a long-term sustainable level of electricity prices, it will first and foremost be necessary to deal with the rationality of subsidising the supply of more expensive new energy sources and the rationality of subsidising the electrification of transport, and to show a little more confidence in the possibilities of protection against price risks that are developing in the electricity markets. Otherwise, I am afraid that even in the absence of war, another similar price experiment awaits us in less than a decade.

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