Energy situation: How to secure electricity this winter

There is no doubt that Serbia is facing a very difficult winter in the energy sector. Even firewood and pellets, energy sources that Serbia has in abundance, have risen significantly in price, and high prices are also recorded for oil and coal. Only electricity and gas, which are under state control, hold the old price. This is maintained with the support of the budget, last year guarantees of EUR 200 million were given for borrowing by Srbijagas.

EPS is also in deep financial trouble because it artificially keeps the price low for both households and the economy. That is why it is certain that the new convocation of the parliament will have to approve state guarantees for EPS borrowing (as well as new Srbijagas borrowing) among the first tasks. This was confirmed by President Vučić, adding that at least one billion euros will have to be set aside for energy. But even the state injection to EPS is not a guarantee that we will have enough electricity over the winter. At the same time, since there are also problems with electricity production in Europe, it is uncertain whether it will be possible to import electricity that will be lacking at critical moments.

EPS lacks not only coal, but also water

In principle, EPS can produce enough electricity for our needs, but the situation turned upside down after the December collapse of production at the Obrenovac power plants. All the problems that have been put under the carpet for a long time surfaced. For a long time, mining engineers have warned that it is necessary to invest in the opening of new deposits because the existing mines are already exhausted and do not have enough quality coal. However, the management of EPS did not want (or dare) to give up unproductive fields and start opening new ones.

It wasn't just a problem to secure funds for the investment, but it also required a certain amount of time to start digging coal at the new mine, and during that time there won't be enough coal for the regular operation of the thermal power plants, and that's why production has to drop for a while. This is exactly what is happening now, production is reduced until the new mine is activated. The reluctance to listen to the profession came, in accordance with the proverb "where it's thin, it's broken", at a time when the price of electricity in Europe was at a record high. According to Minister Zorana Mihajlović, more than 500 million euros have been paid for the import of electricity so far, and this is not the final amount since electricity is still being imported.

It takes time to get coal from new deposits, so by the end of the next heating season, Kolubara will not be able to provide enough coal. Currently, around 60.000 tons of coal are mined in Kolubara per day, and according to announcements from EPS, production will increase to around 80.000 tons from autumn. In order to work during the winter, at the time of peak electricity consumption, it is necessary to provide as much as 100.000 tons per day for TENT-A and TENT-B in Obrenovac. At the same time, the Obrenovac power plants will meet the winter without enough coal in the landfills (under regular circumstances, during the summer, the excess coal that is mined, but not consumed, is deposited for cold winter days).

Some will be covered by importing coal from the environment, but it should be borne in mind that it is an expensive operation because lignite is a low-calorie coal and its transportation is too expensive; that is why power plants are built in the immediate vicinity of coal deposits. The purchase of coal from Banovići, Pljevlja and Romania was contracted (due to the low-quality coal from Kolubara, EPS has been buying Romanian coal for several years and mixing it with local coal). President Vučić even proposed a "barter" in which EPS would deliver a certain amount of electricity to Kosovo's lignite, but that proposal was rejected, and the question is how it would be implemented considering that there is no adequate railway transport.

The second trouble that befell the EPS has nothing to do with the human factor, but is a consequence of the spring drought, which can be seen with the naked eye by the water level of the Sava and Danube rivers near Belgrade. The lack of precipitation has led to hydroaccumulation being at the lowest possible level, even below 50 percent of the average for this period of the year. In addition to obtaining the cheapest electricity from them, hydroaccumulations are also EPS's golden reserve for balancing the system and covering possible failures in thermal power plants. With such a low water level, the system will be additionally strained, so it will be much more dependent on imports than usual.

Will there be enough imported electricity?

EPS will have to rely on significant amounts of imported electricity, but there are also problems in Europe, so the question is whether it will be possible to import electricity. There are a number of reasons why Europe is in an energy crisis. At the end of the year, Germany will turn off the last nuclear power plants with a capacity of 4.500 MW (approximately that much power is needed for consumption in Serbia over the winter), and new stable sources of electricity are not provided. A much bigger problem is the state of the French majority state-owned company EDF. At the moment, a large number of nuclear reactors in that country are out of order, and at one point even half of the reactors were out of order (all this is incredibly reminiscent of the situation in EPS). Some reactors are undergoing regular maintenance, while others are being examined for suspected corrosion at the welds in the pipes. The first problems with corrosion were discovered in December last year, so the authorities decided to examine all 56 active nuclear power plants, which provide as much as 70 percent of electricity in France. It turned out to be a systemic problem that has a larger number of nuclear plants and which does not pose too great an immediate danger, but during repairs, electricity production must be stopped. Corrosion problems cannot be solved easily and quickly, and according to the assessment of the French regulatory body, it will take several years to remediate. It is estimated that in 2023, EDF will have 80.000 GWh less production from nuclear plants than a few years ago; for the sake of illustration, the annual consumption of electricity in Serbia is about 35.000 GWh.

These power plants, in addition to supplying France, are also the "backbone" of stable electricity production in Europe, which is increasingly dependent on variable renewable sources (RO). Due to the fight against climate change, the production of electricity from coal and gas is systematically suppressed, so numerous coal-fired power plants are closed, and permits for new coal mines and power plants are not issued, nor are new gas deposits explored. For environmental reasons, the construction of new nuclear power plants has been abandoned in several countries in Europe, and the existing ones are either rapidly being shut down due to environmental pressures, as in Germany, or are simply being shut down due to age (the life of a nuclear power plant is 50-60 years). French nuclear plants are therefore extremely important for the stability of the European energy system: they produce large amounts of electricity regardless of weather conditions and do not emit carbon dioxide. But there is also a problem here, since a large number of power plants were built in the XNUMXs and XNUMXs, so they are nearing the end of their lifespan.

The dangerous games have already begun.

There is also a risk that Europe will run out of Russian gas. For now, five EU countries have been left without gas due to the refusal to pay in rubles, and it is not excluded that the escalation of the conflict in Ukraine will lead to new pressures to stop buying Russian gas.

Problems with the supply of Russian gas escalated (again) when in mid-June Russia sharply reduced gas deliveries via the Nord Stream gas pipeline, from 167 million cubic meters per day to 67 million, even to those companies that accepted to pay in rubles. The Russian move is explained by the fact that the Siemens turbine for pushing gas in the "North Stream" pumping station was kept for overhaul in Canada due to sanctions. This happened, to Europe's pain, at the moment when there was an explosion at the huge liquefied gas terminal in Texas (through which a lot of liquefied gas was coming to Europe), and its repair will take several months.

There is no doubt that Russia will insist to the end that the machines from Canada be returned first before releasing an adequate amount of gas. The Germans called it blackmail, but they quickly began negotiations with Canada so that the equipment would be returned to Russia. The consequence is that the EU will not be able to fill the gas storages to the desired level over the summer, which will make it even more dependent on Russian gas. And of course, the price of gas on the market jumped by more than 50 percent overnight, so Russia almost always gets the same money for a significantly smaller amount of gas.

Fabulously expensive electricity

The price of electricity on the European market shows that there are great uncertainties about the supply of electricity during the winter. The annual supply of electricity to economic entities is now contracted at the level of 200-250 euros per megawatt hour, and for the first quarter of 2023, the price will go up to 300 euros per megawatt hour. That's more than four times more expensive than just a year ago!

In order to avoid social upheavals due to the enormous increase in the price of energy, a large number of EU member states are currently subsidizing household consumption. Such a policy has further increased budget deficits and is not sustainable in the long term. Central banks have started to raise interest rates in order to "rein in" inflation, which is a growing problem. At the same time, the European Central Bank is suspending the government securities purchase program, which artificially lowered interest rates on government borrowing. This significantly limits the maneuvering space of states to intervene with new subsidies for the population.

That things regarding the price of electricity are not going the way European politicians imagined, can be seen from the fact that the President of the European Commission, Ursula von der Leyen, at the session of the European Parliament on June 8, "admitted" that the electricity market no longer works. This is a major turnaround: until now, the EC has persistently referred to the conclusions of the European energy regulatory bodies, which claimed (the last time on April 29 this year) that the market functions exactly as it was designed and that the electricity price formation mechanisms cannot be blamed for the current price of electricity. Such a statement was almost unimaginable, since last fall, the EC has categorically rejected the requests of a number of countries, led by Spain and France, for the reform of the electricity market several times. But, even though the problems with this kind of electricity price formation have escalated, the reform of the electricity market cannot happen overnight.

It is an extremely complex mechanism that affects a large number of electricity producers, their long-term plans, as well as consumers. In addition, not all countries within the EU have a similar situation regarding electricity production (some depend more on coal, some have a lot of electricity from OI, and some have large production from hydro and nuclear power plants), which further complicates the harmonization process. The EU would be incomparably easier to get out of the problem it created itself if it would, at least temporarily, give up carbon taxes or significantly reduce their price. But that would represent an attack on the ideological "sacred cow", i.e. the Green Agenda and the need for accelerated decarbonization.

The more OI, the more unstable the system

The increasing participation of renewables in the energy mix, along with the reduction of production from stable sources such as nuclear and fossil fuel power plants, has increased instability in the continent's power system. Consumers must get electricity even when the wind stops blowing; that lack of energy from "renewable sources" (ROI) can be quickly compensated only by turning on gas turbines (or from accumulations in hydropower plants, reversible or ordinary, but there are very few of them in Europe). Gas is an (too) expensive energy source when used to produce electricity, and in addition, the price of electricity from gas has (politically) increased due to the sudden increase in carbon taxes. In addition, "danguba" must be paid to the producers of electricity from gas. Those power plants stand idle until they receive an "order" to turn on the gas turbines due to a lack of electricity from OI, or some other reason, and thus provide the missing amount of electricity on the market.

If an extremely high price is not paid for the operation of gas turbines in times of crisis, the owners of those plants would have no interest in keeping them in reserve, but would simply close them down.

We can explain this with an example from everyday life: if you want a taxi to be at your disposal at all times, and you don't know when you're going to leave, you have to pay him that danguba, otherwise he won't wait for you. If that doesn't suit you, you risk waiting for a taxi (when it's raining) for up to an hour. The trouble is that you can't "wait" for electricity like a taxi on the street, but you have to have it available at all times. Therefore, the increased use of non-permanent OI leads to the need to keep increasingly large capacities for the production of expensive electricity (mainly from gas) in reserve, which also increases the cost of balancing.

It is a big illusion that the increased participation of renewable energy sources will automatically reduce the price of electricity, since the increasing participation of non-permanent renewable energy sources in the energy mix sharply increases the costs of balancing the system. Simply, there are no adequate "reservoirs" to store excess electricity. Part of the "surplus" energy can be saved in reversible power plants, and that is why their construction is being started in Serbia today, but none of them will be finished by the end of this decade.

How the price of electricity is formed on the European market

In the fully liberalized electricity market in the EU, a large number of companies produce electricity from different sources: these can be nuclear power plants, hydroelectric power plants, gas power plants, wind farms, solar power plants, and coal and fuel oil thermal power plants. Like production, the sale of electricity on the EU market is demonopolized, so consumers can choose the supplier from whom they will buy electricity. The price of electricity is formed in accordance with supply and demand, with the condition that it must be ensured that consumers have electricity at all times.

Electricity producers have very different production costs (they are the lowest in hydropower plants, while they are currently the highest in gas power plants). As electricity must be available to all consumers at all times, suppliers are forced to purchase electricity not only from cheap sources, but also from more expensive sources, until they fully satisfy consumption. First, the cheapest electricity offered is purchased, and then electricity is purchased from the next most favorable bidder, until a sufficient amount is provided. The final price of electricity on the market is formed according to the price of the most expensive electricity purchased from the producer, and it is paid to all electricity producers (even those who offered lower prices).

This is where the problem arises because consumers pay for electricity at the price from the most expensive source, which at the moment is gas, which has risen enormously in price over the past year, and the price of that energy has been further increased due to the sudden increase in carbon taxes. The consequence is that companies that get electricity from "cheaper" sources than gas make enormous profits (if this were applied in Serbia, the price of electricity would be at least four times higher). This mechanism of electricity price formation caused great dissatisfaction, above all in the Mediterranean countries.

What disrupted electricity prices in Europe

It should be said that until a year ago, the electricity price formation mechanism worked relatively well and the price of electricity for consumers in Europe was favorable. But, the sudden increase in the price of natural gas on the market that occurred last summer due to the recovery of the world economy after covid, as well as the three-fold increase in carbon taxes, led to drastic disturbances in the electricity market. The production of electricity from fossil sources became too expensive, which led to a multiple increase in the price of electricity on the market, since "cheap" renewable energy sources could not provide all the necessary energy. In addition to all that, the permanent shutdown of nuclear power plants increased the need for energy from fossil fuels in Europe and this method of price formation proved to be a failure.

European politicians were convinced that these were short-term disturbances, however, time denied them. That's why the President of the EC accepted that the model was outdated, because it was set when the production from OI was small and when it should have been encouraged.

The big problem with this quasi-market model of selling electricity is the politically introduced carbon tax. The sudden jump in the price of that tax occurred last year due to the political decision to significantly reduce the number of available carbon quotas, with the intention of disincentivizing the consumption of fossil fuels as much as possible. This only further disturbed relations on the market as it drastically increased the price of electricity from gas, and it also affected the decreasing production of energy from coal. The initial idea to stimulate the OI succeeded, but now it has been taken to an extreme, which has led to a huge blow to the population standard and significantly increased inflationary pressures.

Big risks

Russian forces fully control Ukraine's largest nuclear power plant in Zaporozhye, a massive 5.700MW power plant, which covers 20 percent of the country's electricity consumption. At the moment, the electricity goes to the Ukrainian network, but it is not excluded that its production will be "directed" exclusively to the parts under Russian control, although Ukrainian experts claim that it will not be possible to realize it quickly.

If there is a problem in the operation of that power plant, the EU will be faced with the need to supply Ukraine with electricity, and not only with money, weapons and ammunition, which will further aggravate the already unstable energy situation.

Power supply will be critical this winter in Europe, especially if the wind stops blowing during very cold temperatures. There is no favorable scenario for energy (dis)opportunities on the continent, but only a series of more or less bad outcomes. Let's just mention the possibility of the EU completely stopping the purchase of Russian gas, which will also affect the supply of electricity because the operation of gas power plants will be hampered (or interrupted). The best scenario assumes that there will be enough electricity, but it is certain that energy prices will be extremely high.

Problems from Europe will also be felt in Serbia. Even with the import of coal, EPS will not be able to provide enough electricity in conditions of very low temperatures, and the situation is further aggravated by poor hydrology. Last winter, electricity was imported at a high price, but what will happen if the European power system is overstretched for all the above reasons? Who will sell us electricity that will be in short supply throughout Europe in conditions of extreme cold and absence of wind? At what price will EPS have to buy electricity next winter, if up to 250 euros per megawatt hour is negotiated at the end of spring (last spring, that price was about XNUMX euros)?

Serbia could have avoided all this mess with electricity if the management of EPS had listened to the experts, who warned for years that it was necessary to move to new coal deposits and stop digging the already exhausted deposits. As if out of spite, the system "broke" at the most inconvenient moment, so the total damage that EPS will suffer will probably reach more than one billion euros. This is how we got into a situation where EPS, instead of investing and building a new Štavalj thermal power plant, throws that money at importing electricity. At the same time, no one can guarantee that Serbia will have enough electricity during the winter. In all probability, the management of the EPS will mostly monitor the weather forecast next winter and pray that there will be no severe cold, as there were in 2012. A harsh winter can easily lead to large reductions in Serbia, and then it will be little consolation that the same can happen in a good part of Europe.

Read daily news, analysis, commentary and interviews at www.vreme.com