What is behind the skyrocket high electricity bills in December?

Based on what I was reading on newspapers but also following up the recent developments in energy markets, I was preparing myself for a high electricity cost for last month but it still couldn’t prevent the initial shock I had when I saw the electricity bill end up in my digital inbox. I had to pay 776 SEK, around 80 Euros which might not seem much for an electricity bill but you need to take it into account that I am living in a small apartment in Stockholm with quite a modest electricity usage. Relative increase in the energy price (without the grid cost) compared to December 2020 was mind blowing ; 6 times higher from 31,6 öre to 182 öre per kWh as you can see in the image below which is an excerpt from Greenely App.

Overall, households in Europe have paid an average of 54% more for energy in 2021 compared to year before and the price differences was most substantial in December as it was also reflected in my case.

So I was curious about the reasons for this huge increase in electricity costs since the explanation from politicians blaming winter didn’t sound satisfactory considering last December also happened to be a winter month with similar weather conditions. Hence this post to share my journey for finding truth and hopefully save some time on your side from doing the same.

One very simple but major explanation of this is the increase in the price of wholesale energy especially of the natural gas which was quadrupling in a year. Therefore, it hits countries like UK even more where the gas is major source of heating but nevertheless it had substantial impact in other EU countries due to gas still being used to generate electricity for grid especially during winter months as a very flexible generation source. The figure from EnAppSyss Energy Insights which I posted earlier on Linkedin is  showing one of the extreme days where the prices were peaked in whole Europe with UK taking the ultimate hit.

But what changed since last year because there was the need for the gas last year as well? Winter in Europe of course put some pressure on supplies which brings gas levels lower than usual but also  hot weathers in parts of Asia led more gas used for energy needed for air-conditioning as well as economies have been recovering from the covid-19 slowdown in the region increased the demand for energy. Phasing off some nuclear and coal facilities in several countries in Europe increased the need for the gas even further especially when there was not enough energy generated by renewables. This is the demand side of the story where as also on the supply side Europe have been suffering quite a lot due to the decrease in the supply from Russia with some economic and political motives behind but also some disruptions from Norway was not helping the two sides of demand and supply meet.

Another main reason for the increase in energy prices is the rising cost of European carbon permits, which carbon producers must buy to offset their emissions. From around €30 per tonne at the start of 2011, they climbed to a record €63 in early September and hit up to €90 in December. And it looks like it is not getting any cheaper in the future. More coal will be needed to compensate for the lack of natural gas which then will increase the demand for permits and push their price up even more.

Since we talk about the coal, it is also worth to mention that EUcarbon permits is not the only reason for the increase in its price but also supply demand issues similar to the natural gas where we see shrinking supply from European mines combined with increase in the demand from China which doesn’t make the coal much cheaper alternative to gas.

I want to end my post with a positive note that we expect the prices to go down soon but unfortunately, I won’t be able to do so. It doesn’t look like there are any easy and quite fixes to the issues raised above especially when we want to (or more like to have to!) transform into more sustainable world. However, I will try to provide some insights on what is required to make the sustainable energy transition in a more affordable way in my next post.

I will be also happy to hear your reflections on the topic.