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06th-Sep-2018

Lowering electricity prices

By

Christian Chuboda :
Discussions on how to design the energy transition often boil down to the cost aspects. The management consultancy McKinsey released a study estimating the costs for a system change in Europe to a green and decarbonized power sector at €6,600 billion.
Europe's cumulative GDP between 2020 and 2050 is calculated to be €510,000 billion - the system change would therefore amount to 1.3% of the overall GDP.
Still, these are abstract numbers for most citizens. They reach too far into the future and are hard to comprehend, given that implications for the individual level remain unclear.
That is why the price for electricity has become such a conspicuous indicator. Everybody knows more or less what he or she is paying for electricity, and any increase is felt in the individual budget. Electricity prices are now closely connected to the overall energy transition - increasing prices symbolise the failure of the energy transition.
What few consumers are aware of: electricity prices for household consumers in Europe differ a lot. Based on the average of the EU-28 states, the price for one kWh was slightly more than 20 Cents in 2016. However, Danish, German, and Belgian customers payed up to 10 Ct more for each kWh.
The reasons behind the price spread are numerous. First of all, local differences in purchasing power and exchange rates contribute to the fact that Denmark and Germany are leading the ranking compared to Bulgaria having the cheapest prices.
Another explanation frequently offered by politicians, energy-intensive companies or consumers are the varying costs of energy generation in the respective countries. Advocates of this narrative postulate that countries with a higher share of renewables in their energy mix have established a higher price level due to the long-standing subsidies for renewables.
However, the statistics do not support this theory. Sweden, a country that produces half its electricity from nuclear resources and half with hydro power, has a similar basic price, i.e. the price for the production of electricity before VAT as well as other taxes and levies. Moreover, the Netherlands still produce 80% of their electricity using fossil fuels, mostly natural gas. Their basic price is comparable to that in Germany.
Thus, the big leverage to lower electricity prices is not the production side of the equation, but the taxes and levies. Generally, the electricity price for consumers is made up of three major components: costs for production, grid-use and other levies and taxes. The latter two are more or less politically determined.
In Germany, more than half of the power price for household consumers consists of those politically determined components. German citizens find a number of different factors on their electricity bill: 25% of the overall price goes to the power grid providers, the tax for financing investments into renewable energy makes up almost another quarter.
The profit margin and supplier's cost of purchasing wholesale power on the market amount to one fifth of the overall price, other levies total up to 30% of the price. Germany's grid fees are amongst the highest in Europe. Other countries may have higher network fees, but profit from lower costs for the production or lower taxes and levies. Europe's largest country is the testing ground for a complex energy infrastructure trying to optimise the transition from fossil fuels to renewable energy sources while keeping the energy prices at a stable level.
Germany's electricity generation is largely decentralised. Around 40% stem from renewable sources, mostly wind and solar. During the first half of 2018, renewable energy sources satisfied more of Germany's power demands than coal. Renewables will soon be or sometimes already are producing energy at grid parity - meaning they have the same production cost as conventional sources. Again, the production side of the equation will be negligible.
EU champions 'people power' but devil lies in the detail
The European Commission's Winter Package of energy proposals, unveiled yesterday (30 November), is set to boost household and local power generation, but obstacles remain.
One important key to lowering electricity prices in the short-term are the grid utility fees. In a complex energy system with many traditional structures, digital solutions are the most important leverage to bring down prices. By connecting and intelligently controlling power plants, grid-use can be optimised leading to lower grid fees paid by both consumers and industry.
The approach for the grid fees is twofold: With a temporal flexibility, electricity can be intelligently used and stored when renewables produce energy in abundance. A spatial flexibility underlines the importance of sharing energy within a community. The closer to the actual production site the energy is consumed, the better for the whole system.
Thus, grid fees can be cut and hence electricity costs reduced. Suddenly, the perception of the energy transition changes from being a failure to being successful.
The recent deal between European Parliament and Council on the Renewable Energy Directive II (RED II) supports the development of renewables and shows the importance of local generation. RED II strongly backs energy communities and prosumers by including a strong definition of self-consumption. Furthermore, the deal includes a promise to remove all charges on electricity produced by households that is consumed on premise.
By strengthening local structures and excluding the direct use of electricity from taxes and levies, the EU supports the decentralised energy transition and lowers the prices for customers all around Europe.
At the same time, digital solutions help to increase the possible use cases for renewables. As digital solutions make our day-to-day lives easier, why not also make the energy transition successful and affordable? Using digital solutions to bring down grid fees would be a first step.
(Christian Chudoba is CEO of Lumenaza, a German company providing software for decentralised and digitised energy).