UniCredit Bank Austria analysis:
Energy prices at record levels — not expected to ease until 2023
- Wholesale prices up 480% for gas and 330% for electricity in 2021
- Austrian households also feeling impact of sharply rising energy costs since Q4 2021
- Natural gas accounts for 25% of domestic energy consumption; electricity accounts for 17%
- Energy-efficiency measures and expansion of renewable energy sources set to drive reduction of more than half in oil and natural gas imports by 2030
- Decarbonisation of energy market increasingly affecting energy prices
In December 2021, a megawatt hour of base load electricity on the Leipzig energy exchange cost an average of EUR 232, an increase of 330% on January 2021. The prices on the European electricity market reflect the costs of the power plants used to generate the additional electricity demand. Last year that was increasingly gas power plants.
Gas prices trigger record electricity prices in 2021
The wholesale price of gas, then, has a direct influence on the price of electricity. Gas prices increased more than fivefold during 2021 due to strong demand and a lack of natural gas supply. Even though only a portion of the higher purchasing prices incurred by energy suppliers are being passed on to end customers, the energy costs of both domestic and commercial consumers have been increasing noticeably since the end of 2021.
As a result, energy-intensive production operations are becoming less competitive on the international stage and the precarious situation of many households with regard to energy supply will continue to worsen. In 2020, some 60,000 Austrian households (1.5%) were unable to keep their homes sufficiently warm. "Energy price trends and increasingly the uncertain supply on the European energy markets demonstrate that swift energy transition measures are now vital", says UniCredit Bank Austria Economist Günter Wolf.
Delay in wholesale prices affecting consumer prices
The consumer market began to feel the delayed effects of the major energy price hikes of 2021 (which have been evident on the wholesale market since summer) in Q4: On average, domestic electricity costs in Austria for 2021 were up 7% on the previous year, and in January 2022 by a further 6.2% on top of that.
The delayed price adjustments are explained in part by the high number of contracts that include price guarantees and by the fact that electricity and gas prices must be announced in advance (which happened for the most part at the end of 2021).
It is difficult to estimate the extent to which consumer prices in 2022 will track wholesale prices, which are expected to rise further. The share of energy in end consumer prices is 47% for gas and just 33% for electricity. In addition, the 2022 price level will be affected by the suspension of the renewables subsidy surcharge, the increase in network charges and the planned CO2 levy from July onwards. One thing that is certain is that prices will continue to rise exponentially for a considerable period of time.
Current gas and electricity futures prices indicate that wholesale prices are not likely to ease until sometime in 2023. "With the outbreak of the crisis in Ukraine, wholesale gas prices have risen once again and are expected to reach a record average of EUR 170 per megawatt-hour in the course of 2022. The electricity price recently climbed to more than EUR 400 per megawatt-hour and is set to increase still further during the first half of the year. Market participants currently do not expect gas prices to drop in any meaningful way until Q2 2023, when an average of EUR 70 per megawatt-hour is forecast, with EUR 140 per megawatt-hour for electricity", says Wolf.
Energy supply is disproportionately skewed towards gas
The 2021 energy year provided a clear illustration of how dependent energy supply in Austria is on the supply of gas. Due to the relatively dry summer of 2021 and the lack of wind during this period, less electricity was produced from renewable sources and electricity demand across Europe had to be supplemented increasingly by gas power plants, which generate significantly higher production costs. The higher demand for gas, which was also driven by the rapid economic recovery, was not matched by a corresponding gas supply, which triggered a record rise in gas prices. In Austria, electricity production at hydropower stations fell by 5.5% in 2021 and at wind power stations it fell by 1%, while natural gas consumption at thermal power stations increased by 7.3%.
In total, around 25% of energy consumption in Austria is covered by natural gas and 17% by electricity. The share of natural gas in the energy mix has hardly changed for more than two decades, but in 2021 gas consumption rose again by 6%. Of the total of 100 terawatt-hours of natural gas, a quarter were used for electricity and heat generation in power stations and in thermal power stations (11 TWh and 16 TWh). About two-thirds of the gas volume was used directly for heat generation by private households (19 TWh) and commercial consumers (44 TWh). Finally, 5 TWh of natural gas was used indirectly in industrial production processes (mainly in the chemical and steel industries).
Decarbonisation of energy market increasingly affecting energy prices
According to Environment Agency Austria, appropriate energy-efficiency measures and the accelerated expansion of renewable energy sources in Austria could reduce net imports of crude oil by up to 70% and net natural gas imports by more than half by 2030. Based on prices as at the start of March, this would equate to savings of EUR 5.4 billion on crude oil imports and EUR 6 billion on natural gas by 2030. Given the considerable dependence on Russian gas supplies in Europe, it is essentially vital that measures be implemented swiftly. This point is all the more pertinent in relation to the gas supply in Austria due to the stronger dependence on Russian gas, with an import share of around 80% compared to 45% in the EU as a whole. Ultimately, completely replacing Russian natural gas in Europe would be a very expensive process and from a technical perspective extremely challenging if not practically impossible.
The planned shutdown of coal-fired power stations in Europe will lead temporarily to a shortage of power station capacity and higher energy prices. In addition, CO2 certificates will become more expensive, having already increased in price by 140% in 2021 as a result of economic growth and the expectations surrounding the 2030 climate change targets. Rising energy prices on route to climate neutrality in the EU have potential to worsen the competitive position of certain sectors and increase fuel poverty in many households. These are two considerations that require political support in relation to climate protection. That said, the energy transition does require the increase in the cost of emission certificates and fossil fuels so that investments in emission-reducing technologies pay off.
The comparison of domestic prices for the key energy sources in Austria shows that even after the suspension of the green electricity subsidy surcharge in 2022, electricity still costs significantly more than fossil fuels such as gas and heating oil. In the first half of 2021, the gross price for one kilowatt-hour of electricity was 22.2 euro cents, and still 19 euro cents minus the green electricity subsidy surcharge; the figure for heating oil was 7 euro cents and for natural gas it was 6.4 euro cents.
Further information can be found at: https://www.bankaustria.at/en/markets-research-economy-online.jsp
Analysis of energy price trends, UniCredit Bank Austria, March 2022
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UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;
Email: guenter.wolf@unicreditgroup.at