Could the current alarming developments in Czech and European energy have been predicted?

In the long term, the current developments in Europe’s energy sector have been driven by the closure of nuclear and coal capacity without replacement, and reliance on wind and solar sources that are highly weather-dependent. The immediate trigger for the current dramatic situation, however, was the recent reform of the EU ETS emissions allowance market system and the introduction of strict rules for operating coal-fired sources. Let us take a closer look at the origins of the current situation.

Let us recall the situation on the basis of the debate that developed on oEnergetice three years ago around an article by Michal Šnobr describing his theory of the “German dawn”. According to this theory, Germany deliberately shifted from trying to keep emissions allowance prices low to supporting their increase and pushing against coal-fired power plants. The aim was supposedly to use high emissions allowance prices to drive out coal-fired capacity on economic grounds and replace it with gas. At the same time, Germany relied on completing the Nord Stream II pipeline to secure a stable supply of cheap Russian gas that would flow into Europe through Germany. This implied rising emissions allowance prices, with a corresponding increase in electricity prices and impacts on the European energy market.

In my polemic with his views, I agreed with the trend of rising allowance prices and predicted an even larger increase if they were indeed meant to drive out coal capacity and replace it with gas. However, I disputed that this was a planned and carefully thought-out move on Germany’s part. In my view, it was the result of desperate manoeuvring between efforts to defend its position as a leader on the green path towards emissions reductions and the reality created by its nuclear phase-out. Germany could therefore hardly side in the European Parliament with environmentally “backward” states and block the transformation of the emissions market. At the same time, I pointed out that rising allowance prices and a switch to gas would lead to higher gas consumption and thus higher gas prices. This would mean that even very high emissions allowance prices would not be enough to force coal capacity out of the market. This, too, would suggest that Germany was not pursuing a well-thought-out strategy. Allow me to quote part of my aforementioned response to Michal Šnobr’s article:

Let us recall that Jan Veselý also challenged Michal Šnobr in his article. However, he ruled out any major increase in allowance prices. Let us recall his words:

It is clear that the prediction of a dramatic rise in emissions allowance, gas and electricity prices has fully materialised despite Mr Veselý’s doubts. The delay in its arrival was caused by lower economic activity during the pandemic and by the fact that the major reduction in coal and nuclear capacity is only now taking place.

At the same time, Germany’s largely helpless and unprepared stance, and the enormous problems brought about by current developments, rather confirm my view that Germany was not pursuing a well-thought-out strategy. In my opinion, the planned course of the “German dawn” presented by Mr Šnobr has not been borne out. One need only look at current electricity prices in Germany, which range from EUR 100 to EUR 230/MWh.

Current developments also fully confirm my view that the energy sector cannot be solved by building more wind and solar capacity. Developments over the past month have been dominated by very little wind and limited sunshine. No additional installed capacity of these sources would have helped; there would still have been a shortage of electricity from them. At times when there was strong wind, as there was last weekend, there would instead have been an even larger electricity surplus. The currently installed capacity alone led to zero wholesale electricity prices on the exchange in the region. The claim by green activists that electricity prices and problems in Czechia would have been smaller if far more wind and solar capacity had been installed earlier is completely divorced from reality. High electricity prices are predominantly spilling over to us from Germany, which has been by far the leader in installing these renewable sources.

If, when the emissions allowance system was launched ten years ago, their price had been set at an effective level so that they would genuinely lead to the displacement of coal capacity and a transition to low-emission sources, developments similar to those now taking place would have occurred earlier. I also wrote about this in my articles at the beginning of the previous decade. It is therefore clear that the current developments were foreseeable, and it was not only Michal Šnobr and I who predicted them. At the same time, I would point out that the confirmation of these predictions suggests that forecasts of very adverse developments should fossil-fuel capacity be closed without adequate replacement by corresponding low-emission sources could also come true (see, for example, here).