What factors determine the price of electricity?
Helmut Buender
Business correspondent in Düsseldorf.
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Archibald Preuschat
Editor in Business
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Julia Loehr
Business correspondent in Berlin.
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As in any other market, there is supply and demand - and they have to match exactly: At any given time, only as much electricity can be fed into the grid as is consumed.
The balance is the frequency, which in Europe is 50 hertz.
It increases when less electricity is consumed than is fed into the grid and falls when consumption is greater than the grid fed into the grid.
If the frequency in the power grid drops too quickly or too slowly, generators can be damaged.
To balance supply and demand, there is a spot market where electricity is traded for the next day.
Here the price is primarily determined by the weather.
If it is cloudy and windless, and there is a lack of renewable energies, then other, more expensive energy sources such as nuclear power, coal, gas or oil are needed.
Why are the electricity prices on the spot market so high right now?
There is a shortage on the electricity market, says Tobias Federico, Managing Director of Energy Brainpool.
In addition to the high gas prices, he cites the drought as reasons.
The low water levels impede the transport of coal on rivers as well as the cooling of power plants.
The drought is also hampering hydroelectric power generation.
There are also technical problems at the nuclear power plants in France.
Only 25 gigawatts of the installed capacity of 62 gigawatts are currently available there.
In addition, according to Federico, the futures market, i.e. trading for future deliveries, is currently very illiquid and therefore even small delivery quantities can lead to high price fluctuations.
So the price of electricity is also determined by the situation in France?
Yes, the electricity market is European.
Germany is currently exporting a lot of electricity to France and Switzerland, says Marcel Steinbach from the Federal Association of Energy and Water Industries.
At the same time, it imports a lot of electricity from Scandinavia.
How will the price of electricity develop, will it remain so expensive?
With a view to the next 2 to 3 years, the price of electricity will certainly fall again.
By then, more LNG terminals will be online, says Hanns Koenig, energy market expert at Aurora Energy Research.
The big question for him is the development in the next 18 months, although the situation in the winter after next could be even more difficult than in the next.
But he sees many negative developments already priced in.
What role do gas-fired power plants play in this?
Power plants operated with gas are particularly flexible.
Depending on requirements, the operators can quickly ramp up or down the power again.
Gas-fired power plants therefore often form a kind of safety net when there is a risk of electricity shortages.
Although gas is more expensive and scarce than ever before, it cannot do without the expensive electricity from gas-fired power plants.
In July, they contributed almost 10 percent to electricity production, compared to around 11 percent in the previous month.
Is this small share so crucial for the market?
The order in which power plants are used to produce electricity (merit order) is based on current production costs.
The lowest are for electricity from wind and sun, because there are no fuel costs, followed by nuclear power plants, lignite, hard coal and natural gas.
However, the currently required power plants with the highest costs determine the current trading price for the entire electricity market.
And because the gas power plants are playing the key role, they set the price.
Exceptions are long-term contracts, for example between municipal utilities and electricity companies such as RWE, in which the prices are sometimes set years in advance.
That is why the extremely high stock exchange prices do not immediately affect the end consumer.
In the medium term, however, at least part of the higher costs will reach them.
Does the federal government want to change pricing?
no
The Economics Ministry of Robert Habeck (Greens) has announced a reform.
However, this should not shake the merit order principle.
This basic principle of the European electricity market should be retained.
Rather, the aim is to eliminate the negative effects of the merit order, "to find a mechanism that allows the excess profits to be passed on to the end customer".
EU Commission President Ursula von der Leyen also announced a reform of the European electricity market on Monday.
When should Habeck's plans take effect?
There will be no quick relief for consumers.
We are talking about "medium term", which can also mean several years.
A reform is complex and must be coordinated with other European countries, said Habeck's spokeswoman.
The SPD, in particular, is now putting pressure on government price caps for both gas and electricity.
Can German nuclear power help?
Opinions differ.
Resistance comes mainly from the Greens, but Economics Minister Habeck no longer ruled out an extension in principle.
The network agency was also open.
In a stress test, the federal government is examining whether the power grid could do without nuclear power if gas had to be saved at the same time and more electrical energy was required for this.
How can that be balanced?
The share of nuclear power in German electricity production was around 7 percent in July.
Even more climate-damaging coal-based electricity would be needed for a short-term replacement.
The first hard coal-fired power plants have already been retrieved from the reserve and should be producing for the market again by next spring in order to reduce gas-fired power generation.
Several lignite-fired power plants that were temporarily shut down are also scheduled to go back on line in October.