Thomas Schoy, co-owner and Managing Director of the Privates Institut Group, explains why the energy transition will not make electricity cheaper - and why there is still no alternative to expanding renewable energies.
Hardly any other topic currently concerns Germans as much as the development of electricity prices. In this context, a persistent misconception persists in the form of the assumption that the expansion of renewable energies automatically leads to falling energy prices. This idea is fueled by the inadequately analyzed studies used in many cases, which rarely distinguish between real prices and nominal prices. The reality paints a different picture here: electricity prices are rising, even with an ambitious expansion of renewable energies. Fundamentally, the reasons for this are manifold and range from the increasing electrification of all sectors of the economy to the necessary expansion of new power plant capacities and the retirement of older, depreciated coal-fired power plants. Renewable energies such as solar and wind power are primarily having a dampening effect on this price increase, but cannot prevent it entirely.
Real and nominal prices
However, the way in which prices are viewed plays a decisive role in forecasts. Real prices show the development taking purchasing power into account by removing inflation from the calculations. This presentation provides a clear view of cost trends and enables a neutral comparison over longer periods of time. Nominal prices, on the other hand, contain inflation assumptions, which means that forecast prices appear higher and higher over time. For the electricity market, this means that analyses of real prices provide a distorted picture. Here, the inflation-adjusted effects on investment and operating costs become visible, which can lead to uncertainty in the public perception. This is particularly true in connection with renewable energies, whose cost structures are more stable in the long term than those of fossil fuels.
Stability instead of illusions
Electrification has been spreading across almost all sectors for some time now: Transportation, industry and households are increasingly relying on electricity as their primary energy source. This growing demand is coming up against an energy system that is ageing at the same time. The shutdown of coal-fired power plants that have been written off creates a need for new power plant capacity. Such new plants, even if they run on renewable energy, initially entail higher costs as they require financing through investments. In this scenario, renewables act as a buffer that cushions price increases. It is true that the costs of solar energy have been falling for years due to technical progress and economies of scale. Nevertheless, the overall effect on electricity prices remains limited, as the expansion of generation capacities and the expansion of the electricity grids is associated with considerable investment. This is because the increasing expansion of renewable energies is increasing the volatility of electricity generation, which is reflected in more volatile prices on the one hand and necessitates the construction of a large number of new gas-fired power plants on the other. These power plants are intended to compensate for the fluctuations through their rapid responsiveness and serve as so-called "residual power plants". In other words, they supply the proportion of electricity that is required independently of the volatile energy sources of wind and solar power. What's more, the price of electricity basically develops in parallel with the price of gas - not good news in times of geopolitical tensions.
Honest debate needed
In order to realistically assess the energy transition, discussions about electricity prices must clearly state the difference between real and nominal prices. For example, the focus on inflation-adjusted data shows that renewable energies such as solar energy are an economically viable and ecological necessity in the long term. At the same time, there is an urgent need to correct the expectation that the energy transition will automatically lead to falling electricity prices. Investments in new technologies, power plants and electricity grids require financial resources that have an impact on electricity prices. These costs are unavoidable as the energy system is being put on a sustainable footing. Renewable energies do not create the illusion of falling prices, but offer the opportunity of long-term security of supply, independence and climate protection. Honest communication about these interrelationships helps to promote acceptance of the energy transition. Electricity prices are rising - but the goal is a stable, sustainable and future-proof energy system that benefits everyone.
