Weird: Germans Worry About Lower Electricity Prices

Feb 06 2013 Published by under European and German energy law

Some people in Germany (not including me) are worried about the surcharges for renewable energy feed-in tariffs. They have reason to worry.

According to a new article at SPIEGEL, even if Federal Environment Minister Peter Altmaiers “price brake” proposals all get enacted, there is still a substantial rise in surcharges possible next year. Of course most of those proposals have no chance to pass the Bundesrat, but even if they did, it would be not enough.

The reason for that is that, according to calculations of SPIEGEL, wholesale prices of electricity are falling too fast.

Why exactly is that a problem? Why do Germans have to worry about falling prices?

I will skip an explanation in detail, having written about the merit order effect earlier in a post titled “The Weird World of Electricity Pricing“. The present system of pricing makes sure that with more renewable in the mix wholesale prices drop.

That in turn leads to higher surcharge costs. These are calculated by subtracting wholesale prices from what is paid as feed-in tariff. With the former number dropping, the difference becomes larger.

This is a weird way to organize things. Bringing down wholesale prices is one of the many successes of renewable energy deployment in Germany. Having that result in higher surcharges makes renewable energy look bad just as it is successful. This whole “merit order” market organization is a complete failure. The market needs to be organized in some other way that remotely makes sense. I will present some ideas for that later in a different post.

Here I would like to present a very simple countermeasure to the particular problem that surcharges rise because of lower wholesale prices:

Never mind. Don’t worry about that.

If one agrees with my position that higher electricity prices are a good thing, since they lead to more energy efficiency, that is evident.

But even if you think humanity can still afford low energy prices on a planet threatened by global meltdown, there is still no need to worry.

That’s because whatever increase in surcharges happens by this particular weirdness will be canceled out.

The prediction for 2013 on which this year’s surcharge is based was EUR 51.15 per MW. SPIEGEL says EUR 40 is a more realistic scenario, citing Tobias Frederico of “Energy Brainpool“, an analyst firm for electricity markets.

Let’s just assume that is true. That would leave wholesale prices about 1 cent lower per kWh. And the surcharge would rise as a consequence.

However, from the point of view of the consumer, these two factors should cancel each other out. If the utility passes on the savings from lower wholesale prices to the consumers, this should be without influence on consumer prices. If they don’t do that and try to rip consumers off, that would be an excellent reason to change to a different utility. Since the German market is liberalized, there is competition, and that should be enough to keep utilities from pocketing the extra surcharges while not passing on the savings on the wholesale market.

It is of course also important to explain this to the average consumer. Probably most consumers in Germany have never heard of the merit order effect and the finer points of its influence on surcharge levels. If they don’t get that explanation, they won’t be able to understand the costs of renewable electricity correctly.

And they might miss out on the opportunity to switch to an honest utility if their provider tries to rip them off.

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