Why are electricity prices so high and volatile?

We've all been there: You're in the middle of an early lunch at a nice restaurant, and then your phone buzzes with a notification from your energy provider saying that electricity prices have just increased. But wait - didn't they go down a few months ago? And why do prices change so much anyway?

TLDR: Energy prices flucuate heavily, depenging on how much wind power is available, how well do nuclear plants function, and what the outdoor temperature is.

Renewables take over the energy mix and will decrease energy prices in the long-run

The cost of renewable energy has been steadily falling. The cost of nuclear power has declined since the 1980s, but the price is still high relative to other energy sources. The cost of gas-fired generation is also rising as more plants come online, and the market becomes more competitive; this is expected to continue over time.

The verdict? Some energy sources are getting more expensive and renewables are getting a lot cheaper. But it takes time and renewables aren't known for their ability to produce a steady stream of energy supply, which forces us to think when we consume electricity. But one thing is for sure, the more renewable capacity we have, the better we are prepared for hours of low-wind or cloudy days.

Adaption of renewable leads to increased volatility

Electricity prices are volatile. They can go up and down, sometimes drastically, depending on the time of day and season.

As a result, electricity costs are  higher in winter than they would be otherwise—when you need to heat your home or apartment with electricity instead of gas or when there's no sun to power your solar panels. Meanwhile, summertime is often more affordable than wintertime because demand for electricity decreases in the Nordics (and there's more renewable energy available).

Sometimes prices decrease at night – sometimes they don't

One of the most surprising things about electricity prices is that sometimes prices rise at night, and even though usually they don't.

That's right—prices can spike or drop anytime and on any day of the week. However, the prices are usually higher during days and weekdays compared to nights and weekends. This has to do with the industrial demand for energy during weekdays. Also, renewables make it more challenging to estimate the supply of energy. This is because power demand fluctuates throughout the day, and how much it's possible to generate electricity from different sources like solar panels or wind turbines. For example, in the Nordics, wind power availability significantly affects energy prices.

Household energy prices are determined by the time of consumption

Demand for household electricity is affected by weather and seasons. There’s a greater need for heating in winter than in summer. More people are at home during the evening in colder months, too, so they use more electricity to run their lights and appliances.

Conversely, in the summertime, when air conditioning systems are running full tilt across the Nordics, it can get so hot that people try to stay cool indoors as much as possible — which could mean they use less electricity than usual on days where temperatures soar into swelter.

Yes, electricity prices change drastically, but better days are ahead

When we are in the transitioning phase to renewables, price volatility will stay high. This depends heavily on the production sources, such as wind power availability or nuclear plant functionality , outside temperatures and others.

However, in the long term, the energy price growth will likely remain moderate – similar to the 2010s. The widely increasing supply of renewables will supersede the effect of increased fossil fuel prices.

Let's not take electricity for granted

With all of this volatility, there are two things we need to keep in mind. First, people have yet to learn what the future holds for electricity prices. We know they will be more volatile than before, but how much? And what is the magnitude of the trend? It’s impossible to say for sure. However, energy transition enables households to spend more affordable and environmentally if they wish to use their smart appliances.

The second thing we must remember is this: while electricity prices may be volatile, they will likely decrease over time as more renewable energy sources come online. That means that even though you may have been paying an unusually high rate today because of market conditions (or just bad luck), those rates will eventually go back down once the market adjusts accordingly.