The high energy prices are an attack on the finances of citizens, companies and the government. And that leads to many questions due to the complexity of the energy market. Energy editor Tjerk Gualthérie van Weezel deals with the most pressing issues.
Gas temporarily cost more than 300 euros per megawatt hour this month, this week the price dropped again to around 240 euros. But what price is that exactly?
About the price that buyers on the Dutch gas exchange TTF have to pay for gas to be delivered in the coming month. TTF is the place where most gas trade takes place in Europe. The contract for the coming month is the contract that is traded the most within the TTF. In general, the more a product is traded, the better the price reflects what new developments mean for the value of gas.
To indicate the impact of that price, it is good to know that 1 megawatt hour of energy corresponds approximately to one hundred cubic meters of natural gas. An average household in the Netherlands now uses about 1,200 cubic meters of natural gas per year. If natural gas costs 300 euros per megawatt hour, it means that the energy provider has to spend 300 euros per month to buy gas for that family. For years, the wholesale price was around 17 euros.
Is it really that simple to pass on that price to the consumer?
No. How quickly a consumer notices the impact of increased prices primarily depends on the type of contract. With permanent contracts, a consumer only notices an increased gas price when the contract expires. For variable contracts, this is usually twice a year: in January and July. Although there are exceptions to this – such as Budget Energie, which adjusts the rate that customers pay for energy every month, and last month decided to increase the advances enormously due to the sharply increased prices.
Furthermore, the gas price is only one of the many items on the energy bill. To start with, there is of course the price of electricity, which has also risen extremely in recent months. The energy provider tries to earn money by purchasing well and by smartly recruiting new customers, but there is also the so-called ‘standing charge’, a fixed amount that providers charge for their costs. Anyone who has a lot of solar panels will also see a negative amount on the bill, the compensation for electricity that is returned to the grid.
Then there are no fewer than four tax-related items on the statement. To start with, there is the energy tax, which is a levy on every kilowatt hour of electricity or cubic meter of gas. Then there is the ‘reduction of the energy tax’, a fixed amount that every Dutch person gets back. And there is the Renewable Energy Storage (ODE) whose proceeds are used to stimulate sustainable energy. Finally, VAT is also charged on the final amount on the energy bill.
In an attempt to dampen the impact of the increased energy price, the cabinet already lowered the tax on electricity last year and increased the ‘reduction of the energy tax’ by 225 euros. In addition, the VAT has been reduced from 21 to 9 percent. Added together, these measures provide an average household with a relief of about 545 euros per year, according to the Tax Authorities.
How is it possible that people who purchase green energy still have to pay more?
There is green gas, which is produced by fermenting residual flows from agriculture, for example. But in the Netherlands, only about 200 million cubic meters of green gas is produced, 0.5 percent of the total gas demand. Most green energy providers supply ‘forest-compensated gas’. That is just natural gas, but trees are planted to compensate for the impact on the climate.
Incidentally, the current situation not only affects the wallet of the green gas consumer, but also the mind. Russian gas is now mainly replaced with LNG, which produces relatively more CO2 costs natural gas. In addition, much of that gas comes from the US. It is won by frackinga technique that many environmental organizations strongly oppose.
Naturally, no natural gas is needed for the production of green electricity. But for the price it doesn’t matter. The electricity market is in fact one market, on which all energy is offered. If electricity becomes more expensive because gas becomes more expensive, this means that producers of green electricity earn more. But not that the buyers benefit from it.
What does the TTF stand for, and how does it work?
TTF (Title Transfer Facility) is actually Gasunie’s network of pipes and storage facilities. Gasunie ensures that the network keeps track of who owns the gas. Within the TTF, various types of gas contracts are traded on a stock exchange. From the so-called ‘spot price’, for gas that must be delivered a day later, to forward contracts for gas that will only be delivered in the winter of 2026.
Is the stock exchange the only place where you can buy gas?
No. There is also a lot of one-on-one trading outside the exchange. At what prices and under what conditions is entirely between those parties. Sometimes there are very long-term contracts. For example, Gazprom had contracts with German suppliers that ran for decades.
The trade in liquefied natural gas (LNG) that is delivered via tankers is completely outside the stock exchange. Anyone wishing to buy LNG must first ensure that they have capacity at a terminal. You then have to make a deal with an LNG provider who will ship the LNG tank to your terminal at the agreed price. The owner can then use that liquid gas himself or sell it on to the highest bidder on the TTF.
Are the energy companies making huge profits now?
There are certainly energy companies that are making unprecedented profits. This applies in any case to all companies that can pump gas themselves. Such as the Norwegian state-owned company Equinor, which earns so much from the export of gas to Europe that it is estimated that it could pay each Norwegian about 1,000 euros a week. The money is also pouring in in countries such as the US, Australia, Qatar and Russia. And the Netherlands is also one of those winners. Gas is still being extracted from Dutch gas fields in Groningen and under the North Sea. The Central Planning Bureau estimates that the Netherlands will therefore have a windfall of around 20 billion euros in 2022 and 2023.
Major gas-producing companies such as Shell and BP are also in good spirits. Shell’s natural gas division made a record profit of approximately 8 billion euros in the second quarter. High electricity prices also mean more profit for energy companies that produce sustainable energy. And then there are large companies such as Trafigura and Glencore, which are involved in the LNG trade. They often have long-term contracts with LNG producers and then look for the highest bidder for that gas. That is now super lucrative.
But there are also many energy companies that do not or hardly benefit. For example, the companies that supply energy to households. Usually their business consists of purchasing gas and electricity themselves and then selling it on to customers. For them, the situation is now especially more risky. Prices are all over the place and customer consumption is much more difficult to predict. While the latter is important: if you have bought energy at the top of the market and then customers turn off their heating en masse, you suffer a huge loss.
Are there speculators who make money from these high prices?
Traders who do not want their name in the newspaper are convinced of this. This is partly due to the fact that sometimes a striking number of long-term contracts for gas are suddenly purchased. These are probably investors who want to take advantage of the hard swinging price. There are also indications that speculators with ‘bots’ are trying to push the price up by automatically outbidding small deals. It’s just very difficult to pinpoint exactly who those speculators are.
Is there anything that can be done to tackle the winners of this high gas price?
There are countries, such as Great Britain, that are trying to do this by introducing a quick ‘lucky tax’ for companies that make huge profits from the increased energy prices. This is now also being looked into in Europe. Until now, the Netherlands has not wanted to do this, partly because the government does not want to interfere in how companies deal with their profits.
This is of course debatable, but it is clear that the effect of such a measure should not be overestimated. After all, the biggest profits are not made in the EU. In the Netherlands, in addition to the government, this concerns Shell and ExxonMobil, which also have a share in Dutch gas production. The cabinet wants to tackle these companies in 2023 by raising the so-called mining levy. But the impact of that measure is limited because the mining tax is again at the expense of the profits of the companies. Higher mining tax therefore means lower profit tax.
The government has the greatest power by taking measures within Europe as quickly as possible to reduce the gas shortage. This can be done by finding an alternative to Russian gas and by using less gas. A lot is happening on both fronts. In the coming months, more and more floating LNG terminals will be put into operation off European coasts. Coal-fired power stations are also fired and nuclear power stations are kept open for longer. Permit processes for wind and solar projects will be accelerated and extra subsidy will be made available for insulating houses.
And then there’s one more important thing countries could do: stop bidding against each other. They are now doing this by subsidizing companies to fill gas storage facilities as quickly as possible. Traders are convinced that at a much lower gas price, the same amount of gas would flow to Europe. The bidding war is therefore mainly at the expense of the taxpayer. It should be possible to do this in a smarter way, although the implementation is quite difficult.
To what extent has the liberalized European energy market contributed to the current situation? And shouldn’t we just go back to energy as a utility?
The sudden loss of a large part of the European gas supply is not the result of the free energy market. However, it is not separate from it. The crucial idea behind the free European energy market, as it was designed at the beginning of this century, is mainly lower prices. The downside is that energy security has been completely lost sight of. This allowed Europe to become increasingly dependent on cheap Russian gas.
It is clear that Europe is now aware of this and governments are pulling out their wallets en masse to restore energy security, at least in the short term. And it is certain that the relationship between market and government in Europe will be the focus of the political struggle in the coming years.
Will we get through the winter, and will the problems be over after that?
The gas reserves are now well filled and the LNG capacity is being expanded rapidly. So Europe will get through the winter. But the high gas price hurts and leads to great uncertainty in the economy. The European Commission has previously calculated that Europe as a whole will have to consume 15 percent less gas if the gas supply from Russia dries up completely. But current prices are so high that households will soon use much less and businesses will close. In that case, the gas price could suddenly collapse again next winter. Especially if the winter is mild and Russia continues to supply gas.
Due to the growing availability of LNG and energy from other sources, the price is expected to gradually become more stable. But it seems very unlikely that such a new equilibrium will be reached within one year.