How the worsening of the conflict in Ukraine affects the electricity bill | companies

The pressure on the world gas market, which has occurred with the economic reactivation in the last stretch of the pandemic, has made visible how vulnerable Europe is due to its dependence on gas. In Spain, for example, almost three out of every 10 megawatts produced in 2021 depended on gas, used as a raw material in technologies such as cogeneration and combined cycle, according to data from Red Eléctrica. And although the main supplier of the peninsula is Algeria, 10.5% of the supply of this energy depends on Russia. And, what is more important for consumer purposes, the rise in international gas prices hits Spanish supplies particularly hard.

It is by way of price that the tension in Ukraine brings record prices in the electricity market that are transferred to the bill. January closed with a average bill of 133.06 eurosfor users with a regulated rate (PVPC), according to the analysis of Facua-Consumidores en Acción.

The European battle for energy sovereignty

How the worsening of the conflict in Ukraine affects the electricity bill

Gabriela Lopez Escalante and Luis Alberto Peralta

Special on the European energy crisis: context, causes, consequences and scenarios

How does this contagion occur, and how could it be aggravated? The mechanism is simple. Russia partially closes the gas tap, forcing Europe (particularly Germany and Central European countries) to look for alternative sources: not only for daily consumption (higher in winter), but also to prevent strategic warehouses from (at levels below the average) are emptied and the ghost of shortages appears. This increased demand collides with a stable supply, which implies higher prices.

However, only part of electricity generation depends on gas. Renewables (wind, hydroelectric and solar) and nuclear make up the rest of the energy mix. But here comes the pricing mechanism. In Spain, and throughout Europe, the price of electricity is set through daily auctions to cover the demand forecast for the following day. Generators put energy up for sale and buyers buy the cheapest first (solar and wind, whose variable cost is close to zero) and then the most expensive (nuclear, coal or gas). But the price is set by the most expensive energy to enter the system, which these months has been natural gas.

Thus, in practice, the price paid by citizens for electricity, which rose by 72% in 2021 according to INE data, is derived from the price of gas, as the most expensive technology and given that, barring circumstances exceptional weather conditions, the other sources do not cover the market. Gas generation also becomes more expensive due to the cost of greenhouse gas emission rights. And, to finish the cocktail in Spain, the regulated electricity rate immediately picks up the wholesale market prices. Thus, although Spain depends marginally on Russian gas, Spanish households have been, and will be, the first to notice the war tensions several thousand kilometers away.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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