Bigger shocks come with your electricity bills

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An oil crisis hits the economy like a big wave breaking on the beach: the impact is immediate and dramatic as the crest plunges onto the shore. An electrical crisis is another type of shock: Similar to a rising tide, it is slow but relentless and there, surprise, you are overwhelmed.

This difference explains why policymakers and investors focus on oil and tend to ignore electricity. This is a big mistake, as another major electricity price crunch is ahead, much like the one Europe experienced at the end of last year.

Almost unnoticed, regional power forward contracts for late 2022 and, crucially, for 2023 have risen significantly in recent weeks, heralding further rises in utility bills. In some cases, futures have reached record highs, having jumped around 40% in the past two months.

Electricity prices jumped in December and then at the end of February for a few days. Since then, overnight prices have fallen. The fall is deceiving. In electricity, what counts are the cumulative averages. The monthly averages paint a worrying picture.

So far in May, Germany’s benchmark one-year power forward contract has averaged 222 euros ($235) per megawatt-hour, heading for its highest monthly level on record, above the previous record set last December at 207 euros per megawatt hour. Before 2021, the highest average for the same reference contract was 83 euros in July 2008.

The war in Ukraine, which has driven up the prices of natural gas and coal, is the main driver of this crisis. It is also exacerbated by low nuclear power generation in France: state-owned Électricité de France SA recently cut its nuclear generation forecast for 2022 to less than 300 terawatt hours, down more than 30% from to what it produced ten years ago.

European utilities buy electricity months in advance on the wholesale market to fix the costs for their customers. And so, the current price increases in the futures contracts are effectively leading to significant increases in the retail price for next year. The push will be similar to last autumn when electricity bills became a political hot potato from Spain to the UK.

Again, the increases could force governments to spend billions of dollars to cushion the impact, via subsidies and tax breaks. The problem now is that the hikes in utility bills would come on top of widespread distress over the cost of living, putting more strain on family budgets. That’s more trouble ahead for the European Central Bank and the Bank of England, which have already been battling high inflation for several decades. If the oil shock caused a wave of inflation, the electric shock will further raise the inflationary tide. With oil, spot market prices will cause pump prices to fluctuate daily. With electricity, the changes reveal themselves every month – and will be particularly dramatic in the future. In the UK, for example, the maximum price that utilities can charge households for their electricity – commonly known as the price cap – is currently recalculated twice a year. Since the prices for the end of 2022 and the beginning of 2023 have been trading at high levels for several weeks already, the ceiling should increase significantly. Cornwall Insight estimates the dual-fuel electricity and gas tariff should rise to £2,595 ($3,238) a year by October, up more than 30% from the current £1,971. Earlier this year, the same tariff jumped 54% before the government stepped in to cushion the blow.

The trends are similar in other countries. German utilities and large power buyers are now trading power for delivery throughout 2023 at more than 200 euros per megawatt hour, a record for that year. To put that into perspective, futures prices in 2019 hovered around $50. Forward electricity prices in France for 2023 jumped last week to more than 300 euros per megawatt hour, a record for the contract. In January, the same contract traded at less than 130 euros per megawatt hour. The impact of these increases will not be felt on retail prices until later this year. But when the electricity market reaches high tide in late 2022 and early 2023, the impact on families and small businesses will be the same: many will drown.

More from this writer and others on Bloomberg Opinion:

Sorry, but for you, oil is trading at $250 a barrel: Javier Blas

McDonald’s exit from Russia ends a hopeful era: Thérèse Raphaël

• Noble gases suffer from Putin’s war in Ukraine: Izabella Kaminska

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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