Is Germany to blame for rising electricity prices in Europe?

The winter in Europe is having an impact on renewable energy production and electricity prices in general. At least that is what some Scandinavian countries are saying.

Since companies cannot store vast amounts of electricity yet, power must be used when it is generated. In the past, the European energy market was stabilized by power produced by fossil-fuel or nuclear plants.

The introduction of more renewables into the system brings more volatility. As the percentage of renewables goes up, so does the dependence on the fickle sun and inconsistent wind.

Without sun solar panels are kept in the dark. A lack of wind keeps wind turbines from spinning. In Europe, it is a phenomenon that usually happens in winter, a time when more energy is needed to stay warm.

Renewables can add to instability

Germans have a word for a period where little or no energy can be produced because there is limited wind or sunlight: "Dunkelflaute" or "dark doldrums."

The technical name is "anticyclonic gloom," which doesn't sound nearly as menacing, though experts cannot agree what exactly needs to happen to get this designation. 

Even if it is a slippery term, the phenomenon is serious. With lower renewable output, other sources of electricity need to be tapped, which can lead to short-term price spikes. Sometimes this means importing it from other countries.

Right now, the dark-doldrums effect is highly relevant for prices, "but for yearly averages it does not matter much," said Mathias Mier, an economist at the Munich-based ifo Center for Energy, Climate and Resources.

"In future, it might have more impact, but it is the role of governments and markets to steer the system into directions that minimize that impacts of 'Dunkelflaute'," he told DW. 

Long-term contracts protect most consumers

Though most electricity consumers in Germany have long-term contracts with price guarantees, others are more price sensitive, particularly industrial manufactures who pay fluctuating daily rates for their electricity. 

Broadly speaking, electricity prices are determined by the type of supply, the costs of maintaining and investing in the grid, taxes and the costs of clean and backup technologies, says Conall Heussaff, a research analyst at the Brussels-based Bruegel think tank.

Heussaff, who who has investigated energy prices and electricity market design, told DW that supply and demand are also factors, but more in the short term. A clean energy system like the EU has will lead to lower average prices in most periods, with brief periods of very high so-called spot prices on the free market.

Norway and Sweden up in arms

This year, Germany has experienced a few short dark-doldrum periods. But one made big waves as the country needed more electricity from other places than usual to cover demand. This led to one of those brief periods of higher prices at home and abroad since electricity goes where demand and price are the highest. 

In the early morning of December 12, a megawatt hour of electricity cost €107 ($112) but that quickly shot up to €936, according to data gathered by Agora Energiewende, an energy think tank. The next day it was back down again, hitting a low of just under €115.

Though prices normalized quickly, the reactions from Scandinavia were immediate. Norway's energy minister Terje Aasland said he was considering cutting shared-energy links to Denmark, while others in Norway want to renegotiate existing connections to Germany and the UK, reported the British business daily Financial Times.

Sweden's energy minister Ebba Busch said she was only open to a new underwater cable connection to Germany if Germany rejigs its electricity market to protect Swedish consumers and their access to cheap homegrown energy. 

Calling for more electricity nationalism is in direct conflict with the European Union's goal of an integrated electricity market. If countries ensure low prices at home before sending electricity abroad it will harm the system and make climate goals harder to reach.

How connected is the European electricity market?

"Overall, Europe's electricity market is deeply, physically interconnected and institutionally harmonized, especially considering it is a collection of many different nation states," said Heussaff. It is the second-largest synchronized electricity grid on the planet after China.

Mathias Mier agrees that the European market is well connected, pointing out that "almost every seventh unit of electricity is traded across borders."

For the European Commission building up that cross-border energy infrastructure is a priority. It will reduce dependence on imports. It will also ensure better access to energy plus help achieve the targets of the European Green Deal to emit 55% less greenhouse gas emissions by 2030 compared to 1990 levels — making Europe the first climate-neutral continent by 2050.

In 2023, renewables were the leading source of EU electricity. They made up 44.7% of the electricity production mix, an increase of 12% compared with 2022, according to Eurostat, the EU's official statistical agency.

Nuclear power accounted for nearly 23% of electricity production, while fossil fuels made up another 32%.

At the same time, the EU Commission warns that electricity consumption is expected to increase by around 60% by 2030. More worryingly 40% of distribution grids are over 40 years old, making it harder to handle increased demand and the addition of more renewables like rooftop solar panels.

To help coordinate the needed investments, the EU has come up with the Trans-European Networks for Energy. These are policies meant to make planning and permitting easier for cross-border energy infrastructure including electricity.  

How can the European electricity market improve?

Nearly anything can be improved. And something as complex as the European electricity market can definitely be improved. Getting countries to agree, invest and follow through are big hurdles though.

For Mathias Mier the biggest challenge to improve the market is "locational prices that reflect the real demand-supply scarcity in combination with enabling demand response."

Price development is important for Conall Heussaff, too. So far, electricity prices have evolved unevenly in Europe, he says. Some regions are lucky to have renewable resources like wind, solar or hydropower, which give them a price advantage. But affordable energy across Europe is essential for competitiveness.

To reduce prices in Europe more generally Heussaff has three suggestions: Incentivize demand-side flexibility to respond to changing conditions, better European coordination for cross-border investments and more physical connections between countries to share energy resources.

Edited by: Uwe Hessler