But that just moves the question. Why has natural gas become more expensive when it has not become more expensive to produce? Furthermore, only 15% of Germany's power production comes from natural gas (https://www.cleanenergywire.org/factsheets/germanys-energy-c...) and the market price has "only" tripled in the last year (https://www.euronews.com/my-europe/2022/08/25/europes-gas-pr...) while electricity prices have increased over 600%. This is price gouging.

>Why has natural gas become more expensive when it has not become more expensive to produce?

Price is a function of supply and demand. Supply was massively reduced by sanctions and war, so price goes up, simple as that.

>This is price gouging.

If electricity producers had enough pricing power to set the price to whatever they wanted without competition they'd already have done so years ago. Again, price is a function of supply and demand, cost of production is only one component.

No, the EU wholesale market uses a marginal price, that does not reflect the cost of generation (supply), but the highest cost available at any moment sets the price for everyone (at least as far as i understand). It s a free market but prices are set by a very inflexible rule.

The marginal price of any good is the cost to produce one additional unit of that good. That applies to electricity too.

Saying "the highest cost available at any moment sets the price for everyone" is misleading, it's also the lowest marginal price required to satisfy the total load required to supply the market.

i meant that in the EU wholesale market , everyone gets the marginal price. It is not the cost of an additional unit, a mwh of renewables is practically free (if paid-as-bid) but gets paid as natgas (because it gets paid-as-cleared)

Yeah but that's how the market pricing works, it's a function of the auction process. Everyone pays the price required to satisfy the demand. See stock opening and closing auctions for a similar process. It feels odd that sellers get the higher price but it makes sense ultimately.

The margin price in that market is the marginal cost of a GW hour by for the last GW that satisfies the load required (demand).

this doesn't change anything. If supply was higher, e.g. using solar/wind/nuclear/coal, prices would be lower

that would work only if non-gas sources generated enough so that gas is not needed at all. As it is right now, solar producers are getting a bonanza in profits because they are being paid at exorbitant prices. At this level, they have no incentive to ramp up production to remove gas from the equation.

There's no single "they" for "solar producers". No matter what the existing producers do, even if they would all illegally collude, the current prices make it attractive for individual households to install solar panels and thus add new solar capacity.

> At this level, they have no incentive to ramp up production

In a monopoly situation, yes. Luckily there is competition, and at this level their competition has a great incentive to ramp up capacity. Which, frankly, is going to make them ramp up production so they can capture a bigger piece of the market when the situation isn't quite as ridiculous as it is today anymore.

If I'm making $10 a day from my solar panel, so after 30 days I'll make $300. Job done.

It instead makes sense for me to buy a new second panel for $100 after 10 days and then I can make $20 a day, then 5 days later buy a 3rd.

30 days into this I'll have made $45, and be making $30 a day instead of $10.

> Price is a function of supply and demand. Supply was massively reduced by sanctions and war, so price goes up, simple as that.

But this is not true. Price is a function of whatever price the seller sets. Look at the actual circumstances rather than on mathematical models with no bearing on reality.

> Price is a function of whatever price the seller sets.

Only if customers are willing to buy at that price. Which is only true now because there are no cheaper competitors to turn to, which in turn is because the entire system is operating at capacity.

Over time the high prices incentivizes bringing more power generation and transport online, which is exactly what we are seeing - new/reopened nuclear, coal, and nat gas plants are all planned or coming online across Europe and imports have spiked from places like the US. No one likes high prices but it does incentivize building more capacity that might lose money when prices are low, but make up for that when prices are high. This process doesn't happen over night but sanctions + war (roughly) did. Europe was lulled into complacency by consistent and cheap Russian gas for years.

Also, don't overlook those transport costs. Networks across all energy types are severely constrained and underinvested in. Doesn't matter how cheap you can produce energy if you can't get it to your customers cheaply.

> Only if customers are willing to buy at that price. Which is only true now because there are no cheaper competitors to turn to, which in turn is because the entire system is operating at capacity.

In other words, the price is the marginal price: at the very edge. What is the highest price consumers want to pay for X amount of electricity. You should split it up: say price of electricity is 5$. That means:

Electricity produced at 1$: sells for 5$

Electricity produced at 2$: sells for 5$

Electricity produced at 3$: sells for 5$

Electricity produced at 4$: sells for 5$

Electricity produced at 5$: sells for 5$

Electricity produced at 6$: does not sell, plants get paused

Which is exactly how I would expect it to work. Now if producers expect prices to remain high, or for there to be repeated spikes in price, I would expect the $1, $2, $3, and maybe $4 producers to invest in additional production or storage over time to capture additional marketshare and thereby profits. Of course the "over time" part is important since that process can't happen overnight and is constrained by labor and components.

There is some context missing there: the amount of power buyers need. So a simplified example:

Buyers are willing to pay $5 to secure 100GW of power. Sellers are: 80GW Solar at $3 and 20GW Coal at $5.

At 100GW the price is $5 because it's the price that will secure 100GW. If buyers only needed 80GW the price would be $3.

There is only one market price and it's the price that gets the required quantity of power (as you say).

not all plants can be paused quickly...

Sometimes that means: Electricity produced at x$: sells for -5$ (I pay you to use it)

Yea there’s a lot of forecasting, inefficiencies, and other distortions involved. Energy supply chains aren’t easy

Yes, of course there are no cheaper alternatives to turn to. The European electricity market is dominated by a small number of giants which essentially have no competition and does not compete with each other. It's not different from the housing market. Housing isn't freakishly expensive because it has become too expensive to build houses. It is because those who control the market have figured out how to screw over people who need a home to live in (which is almost everyone).

It was the European Commission that designed the integrated electricity market because it was believed that a free market would guarantee low electricity prices for everyone. It seems very naive to believe that this system will function better in the future. For the energy giants it is more profitable to limit supply and jack up prices than to build more capacity.

That is predicated on the rational market hypothesis: that all agents have perfect information, make perfectly rational decision, there is no market friction, and goods are perfectly elastic. Of course, neither of these assumptions are true in this case.

Back in the real world, we can look at hard data. Margins for energy producers and retailers have increased massively in the latest quarter. Also, we know that markets don't react directly (and exclusively) to fundamentals. They react to panics, they react to extremely complex interactions of manual and automatic trading algorithms. Reality is far from the simple "supply and demand" that economics 101 textbooks portray.

1. You mean the efficient market hypothesis?

2. That does not apply here since we are talking cost/profit and not share price

> The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.

Nothing you say is about EMH. Nor does EMH predict that markets react only to "fundamentals", only in that shares reflect the whole set of information.