Expert answer: What is the best way to limit electricity prices?

Electricity prices are rising rapidly, putting pressure on private consumers and the economy. The federal government and the EU are planning countermeasures, including price caps and profit taking. Experts say they are thinking about how this could be done and how the electricity market should change in the medium term.

Following the rapid rise in gas prices, electricity prices are also skyrocketing. Twelve months ago paid out loud Verivox CPI Customers with an annual consumption of 4,000 kilowatt-hours (kWh) are still around 30.5 cents/kWh, up 10 cents in January, and the current price is 51.6 cents/kWh. No reverse trend is foreseen, so the EU Commission and the federal government are planning emergency measures to limit growth and provide money to ease the plight of consumers. Among other things, it is planned to remove “accidental income” from manufacturers and purposefully stimulate energy saving. The price limit is also being discussed.

The Science Media Center asked six scientists what measures to unload electricity consumers should be implemented quickly and concretely.

Limiting the price of electricity “worst of all options”, …

Expert opinions on the electricity price ceiling are very different. Lion Hirt, professor of energy policy at the Herty School in Berlin and managing director of energy management consultancy Neon, is very critical of them. According to him, of all the options, this is the worst.

“Regardless of how exactly baseline consumption is defined, the most important thing is that the energy savings continue to be worthwhile from a financial point of view. We must maintain incentives to save or, at best, increase them,” Hirt emphasizes. “In Austria, you can see how not to do this: as a result, the price of electricity there is limited to 10 cents for almost half of the population – this is about 90 percent below the real prices! This is an invitation to waste energy. at public expense. It also jeopardizes the stability of the electricity grid because people can switch from gas to electric heating.”

Claudia Kaemfert, an energy expert at the German Institute for Economic Research (DIW), agrees with Hirt. Restricting electricity prices could exacerbate the crisis by subsidizing electricity consumption,” she says. “It would be better to subsidize energy savings and make life easier for directly affected households and companies. The limit should not be prices, but costs.”

… or “pragmatic and efficient”?

In Austria, a cap price of 10 cents/kWh will apply to residential customers from December on the purchase of 2,900 kWh per year. Uwe Leprich thinks this is very different from Lev Hirt. Lecturer in Economic/Economic Policy Sustainability Strategies at the Saarland University of Applied Sciences sees the Austrian solution as pragmatic and quickly implemented.

For Germany, however, he sees a price cap of 30 cents/kWh based on the pre-coronavirus period, Leprich says. To get an incentive to save, a percentage of normal average consumption is offered, like in Austria, but depending on the size of the household.

“If we take another 80 percent and the known average consumption of households as a basis, then we get the following basic consumption in the household area: one person – 1200 kWh per year, two people – 2000 kWh per year, three people – 2800 kWh per year, four person and more – 3400 kWh per year.

It’s also a matter of fairness.

Eric Havel, Head of the Department of Economics, Center for Environmental Research. Helmholtz (UFZ) in Leipzig, is mostly open to a price cap if it is part of the “triad”: “Slow down market prices, skim the cream.” random profit” and limiting prices for end consumers. This can be found both in the coalition committee document and in the statement of EU energy ministers.”

However, the state must compensate for the loss of income by electricity producers “from any source,” Havel limits. The constraint limit must also be fair. The chosen range raises tricky design questions: “Should companies also be exempt? Even the highest paid? And second and third homes?” A concrete estimate of basic needs is just as difficult: “Per capita? After historical consumption? Per household?”

No time for long term planning

The definition of average consumption “doesn’t speak for itself,” Havel says. “However, there will be major equity gaps in each model – depending on the composition of the household, prior savings versus previous household ‘spending’, preferential treatment for the highly paid, double preferential treatment for second homes, delimitation into the corporate sector. The coalition document mentions here: “small and medium-sized companies with a utility tariff” – and so on.

Felix Christian Matthes also sees problems in determining average consumption. He is coordinator of research in the field of energy and climate policy in the Department of Energy and Climate Protection of the Eco-Institute. According to him, there will be injustice and dead weight. This is the price of quick, effective price interventions. In any case, you need to make sure that “the development of new climate protection technologies, such as electric cars or heat pumps, is not slowed down by basic consumption patterns,” Matthes warns.

Remove “random profits” from renewable energy?

Claudia Kemfert also sees the danger that the wrong people could be hurt if “random profits” are used to fund aid. Companies that invest in future markets should not be burdened by it, she says. “This can happen, for example, at the expense of a surcharge or a fee.”

According to Kemfert, income should be reimbursed to affected companies and households in a targeted manner. “The obvious downside could be that companies are overburdened and lack the freedom to invest. Therefore, it would be wise to tax only such occasional gains that should not flow into future investments.”

Uwe Leprich, on the other hand, believes that it is “strictly and politically necessary” to strip “random profits” from all energy producers, including renewable energy producers. “The difference between exchange prices and own variable costs, fuel plus CO₂ costs or fees received in tenders – in the case of renewables, can be identified and removed easily and transparently.”

Someone has to pay

Eric Havel also sees serious problems in concrete design. “But the tax would have the advantage of not violating pricing and sound market mechanism,” he says. Here one could consider a mandatory levy that would leave electricity producers with their market revenue, but oblige them to pay a certain amount in the form of a levy.

If sufficient funds are not allocated from the state budget for this purpose, the necessary funding can only be obtained by withdrawing “random profits,” says Christian Matthes. This will not bring down electricity prices, but it will raise the funds needed for the relief effort.

Fundamental Reforms Needed

Scientists agree that cardinal reforms of the electricity market are needed in the medium term. “Electricity prices in Europe are currently based on large price zones,” says Martin Weibelzahl, Head of the Bayreuth Core Competence Center for Financial and Information Management. They do not take into account local availability of (renewable) electricity, local differences in electricity demand, and lack of transport, leading to false incentives and inefficiencies.

In the German power grid, there are sometimes large capacity limits for transmitting electricity. For example, an unlimited amount of electricity cannot be transported between the north and south of Germany. Good wind conditions in northern Germany, for example, have led to a lot of cheap wind power and a corresponding drop in electricity prices for Germany as a whole. This, in turn, creates incentives to use more electricity even in the windless south of Germany.

“To ensure grid stability, wind turbines in the north need to be limited, and the often old, inefficient power plants in the south need to be scaled up to compensate,” says Weibelzahl. “This is called resubmission. This leads to extremely high costs and, at the same time, unnecessary CO₂ emissions.”

Control supply and demand locally

To reduce false incentives, “in a highly decentralized world with thousands and thousands of producers and consumers, we need local market incentives for the production and consumption of electricity. Local prices should control local supply and demand for electricity in the short term, and incentives for investment in sustainable technologies put them where they are needed most.”

“In addition to expanding the use of renewable energy sources, energy storage, load management and a decentralized smart grid infrastructure are also important,” says Claudia Kemfert. “We need a market for all the flexibility options in the electricity market. The reform of the structure of the electricity market should take place in Europe, it is counterproductive to carry it out alone by individual countries.”

Replacing gas-fired power plants should be profitable

For Uwe Leprich, the key question is “whether, based on the stock market price signal, sufficient investment will be made in new, flexible capacity for supply-driven flanking wind and solar systems. If this is not the case, the security of the proposal is undoubtedly at risk,” he says.

“A relatively safe and practical solution would be to give the transmission system operators, as responsible for the control area, additional powers to acquire the foreseeable required flexible capacity through tenders and pass the costs on to network tariffs.”

Christian Matthes does not see an answer to the question of fixing the so-called load generating capacities, replacing gas-fired power plants in the current market structure. These are power plants that can be operated regardless of weather conditions, such as hydrogen or biomass power plants or storage facilities. Here, the creation of (targeted) markets for capacity or flexibility is already overdue.

“The necessary reforms to the electricity market structure are complex, require close cooperation between EU member states, and require time or extremely careful preparation,” says Matthes. “Therefore, it is absolutely necessary to quickly start the appropriate clarification and design processes. At the same time, ad hoc interventions in the structure of the electricity market, motivated by the current crisis, with possible very far-reaching or counterproductive effects, should be avoided. how urgent.”

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