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

Electricity prices are rising rapidly, putting a strain on private customers and the economy.

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

Electricity prices are rising rapidly, putting a strain on private customers and the economy. The federal government and the EU are planning countermeasures, including price caps and profit skimming. Experts say what they think of how it could be done and how the electricity market should change in the medium term.

In the wake of rapidly rising gas prices, electricity prices are also skyrocketing. Twelve months ago, according to the Verivox consumer price index, customers with an annual consumption of 4000 kilowatt hours (kWh) paid around 30.5 cents/kWh, in January it was already 10 cents more, and the price is currently 51.6 cents/kWh. A trend reversal is not foreseeable, so the EU Commission and the federal government are planning emergency measures to limit the increase and provide money to relieve consumers. Among other things, "accidental profits" from producers are to be skimmed off and electricity saving is to be promoted in a targeted manner. A price cap is also under discussion.

The Science Media Center asked six scientists which measures to relieve electricity consumers should be introduced quickly and specifically designed.

Experts have very different opinions of an electricity price cap. Lion Hirth, who is a professor of energy policy at the Hertie School in Berlin and managing director of the energy management consultancy Neon, sees them very critically. Of all the options, this is the worst, he says.

"Regardless of how exactly you determine the basic consumption, the most important thing is that saving energy must continue to be financially worthwhile. We must maintain the savings incentives or, at best, increase them," emphasizes Hirth. "You can see in Austria how you shouldn't do it: As a result, the price of electricity there is capped at 10 cents for almost half of the people - that's about 90 percent below the real prices! That's an invitation to waste energy at state expense . It also endangers the stability of the power grids because people could switch from gas to electric heating."

Claudia Kemfert, energy expert from the German Institute for Economic Research (DIW), agrees with Hirth. Capping the price of electricity could intensify the crisis by subsidizing electricity consumption," she says. "It would be better to subsidize saving electricity and to relieve the households and companies affected directly. It is not prices that have to be capped, but costs."

In Austria, the capped price of 10 cents/kWh will apply to household customers from December for the purchase of 2,900 kWh per year. Uwe Leprich finds that quite different from Lion Hirth. The lecturer for economic/economic policy sustainability strategies at the University of Applied Sciences Saarland considers the Austrian solution to be pragmatic and quickly implementable.

For Germany, however, he sees a capped price of 30 cents/kWh, which is based on the pre-Corona period, says Leprich. In order to get an incentive to save, a percentage of the usual average consumption is offered - similar to Austria - but graded according to household size.

"If you also take 80 percent and the known average consumption of households as a basis, the following basic consumption results in the household area: one person - 1200 kWh per year, two people - 2000 kWh per year, three people - 2800 kWh per year, four people and more - 3400 kWh per year."

Erik Gawel, head of the Department of Economics at the Helmholtz Center for Environmental Research (UFZ) in Leipzig, is basically open to a price cap as long as it is part of a "triad": "Slow down market prices, skim off 'chance profits' and cap end customer prices. This can be found both in the paper of the coalition committee as well as in the statement of the EU energy ministers."

However, the state must compensate for the loss of revenue from electricity producers "from any source", restricts Gawel. A cap limit must also be fair. The range to be selected raises difficult design questions: "Should companies also be relieved? Even top earners? Also second and third homes?" The concrete assessment of the basic requirement is just as difficult: "Per capita? After historical consumption? Per household?"

The determination of an average consumption is "not self-explanatory," says Gawel. "In every model, however, there will be some serious gaps in justice - depending on the composition of the household, previous savings efforts versus previous 'waste' by households, preferential treatment for high earners, double preferential treatment for second homes, demarcations in the corporate sector. The coalition paper mentions here: 'small and medium-sized companies with utility tariff' - and so on."

Felix Christian Matthes also sees problems in determining average consumption. He is Research Coordinator Energy and Climate Policy in the Department of Energy and Climate Protection at Öko-Institut. There will be injustice and deadweight gains, he says. This is the price of quickly effective price interventions. In any case, you have to make sure "that the ramp-up of new climate protection technologies such as electric vehicles or heat pumps is not slowed down by basic consumption models," warns Matthes.

Claudia Kemfert also sees the danger that the wrong people could be hit if "accidental profits" were skimmed off to finance relief. Companies that invest in future markets should not be burdened by this," she says. "This can happen, for example, through a surcharge or a levy."

According to Kemfert, the income should be reimbursed to the affected companies and households in a targeted manner. "A clear disadvantage can be that companies are burdened too much and they lack the leeway for investments. It would therefore make sense that only such chance profits are taxed that should not flow into future investments."

Uwe Leprich, on the other hand, believes it is "strictly and politically essential" to take away "accidental profits" from all energy producers - including producers of renewable energies. "The difference between the exchange prices and one's own variable costs, fuel plus CO₂ costs, or the remuneration achieved in the tenders - in the case of renewables, can be easily and transparently determined and skimmed off."

Erik Gawel also sees major problems with the specific design. "But a levy would have the advantage of not disrupting pricing and the sensible market mechanism," he says. A compulsory levy could be considered here, which would leave the electricity producers with their market revenue but oblige them to pay a certain amount by way of a levy.

If sufficient funds from public budgets are not made available for this purpose, the necessary financing can only be achieved by skimming off "accidental profits", says Christian Matthes. This would not lower electricity prices, but raise the funds necessary for relief.

The scientists agree that fundamental reforms of the electricity market are necessary in the medium term. "Electricity pricing in Europe is currently based on large price zones," says Martin Weibelzahl, head of the Bayreuth core competence center for financial

In the German power grid, there are sometimes large capacity restrictions for the transport of electricity. For example, no unlimited amount of electricity can be transported between the north and south of Germany. Good wind conditions in northern Germany, for example, led to a high feed-in of inexpensive wind energy there 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 have to be limited and often old, inefficient power plants in the south have to be ramped up to compensate," says Weibelzahl. "This is called redispatch. This leads to extremely high costs and at the same time to unnecessary CO₂ emissions."

In order to reduce false incentives, "in a highly decentralized world with thousands upon thousands of producers and consumers, we need local, market-based incentives for electricity generation and consumption. Local prices must control local electricity supply and demand in the short term, as well as incentives for investments in sustainable technologies put them where they are needed most."

"In addition to the expansion of renewable energies, electricity storage, load management and a decentralized intelligent network infrastructure are also important," says Claudia Kemfert. "We need a market for all flexibility options in the electricity market. The reform of the electricity market design should take place in Europe, going it alone by individual countries is counterproductive."

For Uwe Leprich, the primary question is "whether, based on the stock exchange price signal, sufficient investments will be made in new, flexible capacities to flank the supply-dependent wind and solar systems. If this is not the case, the security of supply is undoubtedly at risk", he says.

"A comparatively secure and practicable solution could be to grant the transmission system operators, as those responsible for the control area, the additional competence to acquire the foreseeable necessary flexibility capacities through tenders and to pass on the costs in the network tariffs."

Christian Matthes does not see an answer to the question of securing so-called loadable generation capacities that replace gas-fired power plants in the current market design. These are power plants that can be controlled independently of the weather, such as hydrogen or biomass power plants or storage facilities. Here the creation of (focused) capacity or flexibility markets is overdue.

"The necessary reforms of the electricity market design are complex, require strong cooperation between the EU member states and need time or extremely careful preparation," says Matthes. "Therefore, the prompt start of corresponding clarification and design processes is absolutely necessary. At the same time, ad hoc interventions in the electricity market design motivated by the current crisis, with potentially very far-reaching implications or counterproductive effects, should be avoided just as urgently."