How are electricity prices determined and how much will we pay next year?

In recent months, many media reports threatened high electricity prices, which were supposedly caused by fluctuations in the raw material markets. In this article, we will explain how electricity prices are set and why temporary turbulences in the markets do not greatly affect the end user.

Electricity prices depend on mechanisms enshrined in Polish and European law. Thanks to this, energy producers and sellers cannot, for example, use the unstable market situation caused by the war in Ukraine for their profit. In the article, we will explain what futures and spot transactions are and how they shape the price that we ultimately receive on the account.

Futures versus spot transactions

Electricity prices are set well in advance, sometimes up to two years. Thanks to this mechanism, the energy supplier can determine the demand for electricity, and the producer has time to secure the raw material necessary to produce the required amount of electricity. Such long-term contracts are called futures contracts and are designed to minimize risk for all parties to the transaction. Producers can buy not only the necessary raw materials well in advance, but also obligatory for electricity producers and currently very expensive carbon dioxide emission allowances. In turn, the energy seller also concludes contracts with end users in advance at a specific price.

– Futures contracts are in fact hedging the seller and the producer against price fluctuations. – says Angelina Bartosik, an expert of the Polish Electricity Committee. – The energy producer knows how much energy it will sell, so it is aware of how much raw materials it has to secure and what revenues it can expect. The seller, in turn, is sure that he will receive the contracted volume of energy, which he will be able to sell to end users at a predetermined price. Both the producer and the seller can therefore function uninterruptedly, planning their revenues and necessary investments financed from profits.

Futures prices Source: Polish Electricity Association

However, production cannot always be predicted – especially if the energy comes from, for example, photovoltaic panels. Demand may also exceed forecasts. In such cases, spot transactions are used, i.e. “here and now”, buying electricity at the current price, depending on the current demand for electricity, production from RES, but also fluctuations on the commodity market and the EU ETS. Therefore, in order to be able to offer fixed electricity prices to end users, sellers secure most of the energy with forward contracts, using the spot market to supplement the missing amount of electricity on a specific day.

What will electricity prices be in 2023?

Futures prices on electricity markets for 2023 were significantly lower last year and early this year, before the start of the Russian invasion of Ukraine. The highest contract prices were achieved in August this year, ie at the time when gas prices were breaking their records, and the markets were the most uncertain about the future.

– The year 2022 showed how important futures contracts are in the energy industry. With fluctuations in raw material prices and energy production costs of several hundred percent, previously concluded futures contracts guaranteed uninterrupted supplies and sales of electricity to end users – both households, companies and institutions – says Angelina Bartosik, PKEE expert.

In August, when electricity futures were at record highs, not many transactions were concluded. On August 29, at the highest price, the transaction volume was only 7 MW, which is only 0.14% of the energy contracted so far for 2023. Despite a temporary increase in the model gross margin of producers, in reality the record value of futures contracts had a relatively small impact on the average energy price for 2023, which remains below PLN 1,000/MWh and results from high prices of coal, gas and CO2 emission allowances . The average price at which sellers buy energy from producers in futures contracts, which are concluded for many months or even years ahead, has the greatest impact on the actual energy prices. It is therefore an abuse to claim that the margin of energy producers increased by 7000%. This data relates only to individual transactions, which constitute a fraction of the entire futures contracting.

We control the bills

Although energy prices result from legal regulations and macroeconomic conditions, the amount of electricity bills depends on us. Most items on your electricity bill are based on your electricity consumption. Wisely choosing the electricity tariff and judiciously using electrical devices can affect the amount of the bill, and in extreme cases – despite the increase in prices – even pay less. You can learn more about how to do this on the website of the Polish Electricity Association

Source: Strona główna by

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