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In the observed period, weighted average monthly electricity prices on the day-ahead market in Poland increased from 163.95 zloty/MWh in January 2018 to nearly 444 zloty/MWh (102.85 EUR/MWh) in October 2024. The record weighted average price occurred in August 2022, exceeding 1.3 thousand zloty.
Electricity is essential to modern life and vital to every country''s economy. Starting from 1990, the final annual electricity consumption reached a value of 124.7 terawatt-hours. It eventually grew to 170.3 tWh in 2021, which happened to be a 5.6 percent increase compared to the previous year. Consumption of solar photovoltaic power has become popular in recent years, but also the capacity of solar photovoltaic per inhabitant in Poland has significantly increased, rising from just 0.1 watts per inhabitant in 2013 to 323.7 W/inhab in 2022. In 2022, 18.09 million customers in Poland used electricity with consumption lower than 50 megawatt-hours.
Throughout the years, there have been different methods and sources of electricity production worldwide. Starting in 2012, the electricity production from solar photovoltaic power generated only 3.4 gigawatt-hours. In 2022, Poland''s electricity production volume from solar photovoltaic power reached a peak of over eight terawatt hours. Another source of electricity production was the wind. Where the production of electricity from wind steadily increased from five gigawatt-hours in 2000 to 16,234 gigawatt-hours in 2021. Biogas and biomass also play a significant role in the production of electricity. In 2012, electricity production from biogas and biomass was the highest at around 10,094 gigawatt-hours. However, in 2021, the production decreased, reaching 7,954 GWh.
The past year has been a tumultuous one for European energy markets. After experiencing extreme volatility and all-time highs little more than a year ago,1Eivind Samseth, Fabian Stockhausen, Xavier Veillard, and Alexander Weiss, "Five trends reshaping European power markets," McKinsey, October 19, 2021. power prices across the continent rose to a nearly unfathomable level last fall. Wholesale prices of both electricity and natural gas nearly quadrupled from previous records in the third quarter of 2022 compared with 2021, creating concerns for skyrocketing energy costs for consumers and businesses (Exhibit 1). Prices have since fallen unexpectedly, thanks in part to warm winter weather.
As a result, Europe faces the real possibility of shortages in dispatchable power—sources that are critical for balancing loads across the power system and ensuring there is enough electricity available at times of peak demand. To avoid this scenario and replace the dispatchable generation lost from natural gas, nuclear, and hydro, many European utilities have increased coal production, which had been scheduled to drop drastically. A range of stakeholders are also investing in alternative, low-carbon dispatchable-energy sources, such as hydrogen, batteries, demand-side response, and biomass.
European policy makers and regulators are actively discussing solutions to ease the economic impact of high energy prices.
Although all of these efforts will undoubtedly have positive impacts, the challenges are not likely to end anytime soon. With the frequency of high-intensity heat waves expected to increase, additional outages of nuclear facilities planned in 2023, and further expected reductions in Russian gas imports, we expect that wholesale power prices may not reduce substantially (defined as returning to three times higher than precrisis levels) until at least 2027.9Projections based on futures from Bloomberg, European Energy Exchange (EEX), Nasdaq, and PEGAS.
In addition, because wind and solar generation is subject to natural variations and thus provides intermittent sources of green power, balancing resources (such as hydrogen, batteries, demand-side response, and biomass) will also be required.
Over the next several years, a gap will develop between peak electricity loads and the dispatchable power capacity that can be switched on to meet it. This shortage is expected to worsen as natural gas, nuclear, and hydro production continue to decline while peak loads increase. By 2035, Europe''s gap will be equivalent to 19 percent of dispatchable capacity, or 116 GW (Exhibit 4). This, however, is a worst-case scenario and assumes no new capacity is built.
Efforts are under way to close this gap with clean sources of dispatchable capacity. Over the past decade, considerable investments have been made in utility-scale battery systems, biomass, and hydrogen. Our model suggests that by 2035, more than 100 GW of battery capacity, five to ten GW of biomass, and 20 to 30 gigawatts of hydrogen electrolyzer capacity will be needed to meet peak loads. Yet these technologies have to be further scaled, with build-outs remaining highly uncertain due to a reliance on supportive regulations, the availability of government incentives, and the need for raw materials that are in short supply, such as lithium ion.14McKinsey Power Solutions EU Power Model, November 2022.
Long-term redesigns of Europe''s power market are considered critical to avoiding future price volatility, balancing the needs of consumers and producers, and bolstering investment in new generation capacity. In addition to immediate and temporary measures aimed at lowering prices for energy consumers, European policy makers and regulators are considering several longer-term options to fundamentally reform how the EU energy market operates. Each of these will need to balance the three dimensions of security, affordability, and sustainability:
Long-term redesigns of Europe''s power market are considered critical to avoiding future price volatility and bolstering investment in new generation capacity.
Although the European power market is experiencing one of its most challenging periods, close collaboration among stakeholders (such as utilities, suppliers, and policy makers) can enable Europe''s green-energy transition to continue while ensuring a stable supply of power. With market uncertainty high, players will need to pay close attention to how they navigate the economics of their investments in wind, solar, and other new generation assets. McKinsey''s work with leading players highlights the importance of building a series of strategic scenarios to model how generation and retail portfolios will evolve under different scenarios. Building optionality in portfolios will be a critical component of thriving in such an unsettled environment.
To request access to the proprietary data and analytics that power our insights, or to speak to our team, please contact us.
Markus Schülde is a consultant in McKinsey’s Munich office, Xavier Veillard is a partner in the Paris office, and Alexander Weiss is a senior partner in the Berlin office.
The authors wish to thank Alexander Bülow, Tommaso Cavina, Diego Hernandez Diaz, Thom Luttenberg, Lucas Pirard, and Eivind Samseth for their contributions to this article.
The electricity market report underlines the extent to which a decrease in electricity consumption helped to alleviate wholesale electricity prices. The European Power Benchmark averaged 187 €/MWh in Q4 2022– some 4% lower than in the same period twelve months earlier. The highest prices during the quarter were recorded in Greece and Italy (246 and 245 €/MWh, respectively) and were 11% and 1% higher than in Q4 2021.
Despite price developments in the final quarter, wholesale electricity prices in European markets broke several record highs in the course of 2022, with an unprecedented peak in August. The Russian war in Ukraine affected energy markets resulting in substantial increases in prices, volatility and uncertainty in the energy supply. Record high gas prices, exceptionally low nuclear fleet availability and reduced hydro output due to drought, increased the pressure on the already tight market. In 2022, the European Power Benchmark averaged 230 €/MWh, 121% higher than in 2021. Italy had the highest baseload electricity prices (304 €/MWh on average) in 2022, followed by Malta (294€/MWh), Greece (279 €/MWh) and France (275 €/MWh).
At the same time, the share of renewables increased to 39% in 2022 (from 38% in 2021), while share of fossil fuels rose to 38% (from 36% in 2021). In 2022, the combined solar and wind generation increased their output by 14% in 2022 (+76 TWh). Moreover, solar generation rose by 26% (+41 TWh), onshore wind increased by 10% (+33 TWh) and offshore wind climbed by 4% (+2 TWh). A new record of installed renewable capacity was reached in the EU in 2022, as 57 GW of solar and wind capacity were added to the system. However, subdued yearly hydro generation fell by 17% (-61 TWh) on a drought that affected Europe.
Coal-fired generation increased by 6% (+24 TWh), whereas less CO2-intensive gas generation rose slightly by less than 1% (+1 TWh). Rising gas prices made gas-fired power generation less economically favourable compared to coal-fired generation. Nuclear generation outages and delayed scheduled maintenance in France made nuclear output fall by 17% (-118 TWh) in 2022.
High wholesale electricity prices resulted in rising bills for households in 2022, impacting the industry as well. Government interventions in some EU countries alleviated the bill for consumers. The ease in wholesale prices registered in Q4 2022 reduced the pressure on retail prices.
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