Solar production again reached a record level in the Netherlands this year. However, the price of electricity is skyrocketing, because the price of natural gas largely determines what we pay for electricity. What’s wrong with that?
It’s time to end the “madness” in the electricity market, He said Austrian Chancellor Karl Neihammer on Sunday. It appears to have received support from European Commission President Ursula von der Leyen, who on Monday said he was working on an “emergency intervention and structural reform” of that market.
Both deplore the strong correlation between the price of gas and the price of electricity. Due to the sunny summer and the increasing number of solar panels, more solar energy has been generated in the Netherlands this year. You might think that this leads to a lower electric bill, but due to the higher price of gas, the price of electricity is also rising to record levels.
To understand how this works, we have to look at the so-called special requestIt is the principle that determines prices in the electricity market.
Cheapest provider wins
To supply our country with electricity, electricity is needed from all kinds of sources. Not only are windmills and solar panels in operation, but also nuclear, gas and coal power plants.
The special request It must ensure that our Energy Blend is delivered at the best possible price. This is how it works: electricity suppliers tell you at what time of the day what price they charge for electricity. The “winners” are the cheapest providers that together fulfill all requests. They can actually supply power.
For every kilowatt-hour of energy, we will pay the highest price for any of these auction winners. Therefore, it is not the cheapest supplier that sets the market price, but the most expensive supplier that is still required to meet the demand.
Gas plants set the price
Math example based on last Thursday: About 17 gigawatts of power was needed between 3 and 4 pm. More than half of that came from solar panels and windmills, which provided about 13 percent. The rest came, among others, from nuclear power (3 percent), biomass (4 percent), coal (8 percent) and natural gas (15 percent).
Although the majority of energy comes from (relatively cheap) renewable sources, a number of gas-fired power plants are still required to meet all demand. As the most expensive suppliers, they set the price of electricity. During this hour, it was 500 euros per megawatt-hour. This is six times what it was on the same day in 2021 and 23 times more than the previous year.
Owners of wind turbines, solar panels and coal-fired power plants also received such a high price for electricity, while their costs are much lower. However, due to the functioning of the electricity market, the price of electricity from gas-fired power plants was decisive.
The energy system is slowly changing
This market principle should ensure that investments are made in cheaper ways to generate electricity. Windmills and solar panels are very profitable with these market prices. The more renewable energy we produce, the more often gas-fired power plants are pushed out of the market. Then the price of gas will become less decisive in relation to the price of our electricity.
But changes in the energy market are not settled overnight. In the Netherlands, gas-fired power plants are still very important in the power system. Before the energy crisis, it was relatively cheap and, moreover, it was much better for the climate than coal-fired power plants. Last year nearly half of our electricity came from natural gas.
Normally we don’t have enough power from other sources to turn off all gas-fired power plants. Then electricity will be cut off in parts of the country. So they keep running and fixing the price. After additional consultations by European energy ministers, it should become clear whether this will continue in this way.
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