Is renewable energy threatening the profitability of Swiss electric companies?

Over the past 20 years, the Swiss electricity sector has made billions of francs in net profits, thanks to its dams, which have enabled it to produce and sell a lot of “peak” electricity to our neighbouring countries at high prices in times of high demand. Swiss consumers have benefited in part from this for decades with electricity prices that have been moderate by European standards. But very low CO₂ emission prices, the current overcapacity of electricity production in Europe and the injection of large quantities of renewable electricity into the grid are putting this business model at risk.

With the increasing production of large volumes of solar and wind power in Europe, Swiss electricity companies active on the export market are facing a less favourable situation than in the past. The injection of green electricity into the grid has led to a sharp drop in demand for peak load electricity and thus in its price. This situation is particularly exacerbated at midday, when demand peaks every day; today, this need is largely met by solar power, which is at its highest at precisely this time of day.

Distributors buy electricity from producers at prices that vary greatly over the hours, days and seasons, depending on supply and demand, while Swiss households pay a fixed price for their electricity, between 18-28 centimes per kWh depending on the distributor, including transmission and taxes, which accounts for more than half of the costs. The green electricity injected into the grid creates overcapacity, which contributes to a fall in the price of peak electricity purchased by distributors. For example, the price of peak electricity has fallen by more than a third since 2008, from an average of almost 11 centimes to less than 6 centimes per kWh in 2014, after briefly peaking at 15 centimes in 2010.

The explanation for this phenomenon is twofold. On the one hand, throughout Europe, green electricity is heavily subsidised, which makes it competitive [→ Q89].

On the other hand, green electricity has priority on the grid, i.e. operators are obliged to buy back first electricity from solar and wind power plants that are connected to their grid.

As a result, the facilities traditionally used to cover peak demand, in particular hydroelectric power plants in Switzerland and gas-fired power plants in Europe, have seen their gross margins shrink since 2008, reducing the profitability of the sector. The large subsidies granted to green electricity, which are now necessary to stimulate the spread of renewable energies, have therefore generated distortions in the electricity market that have upset traditional business models in Switzerland and Europe.

However, green electricity (solar and wind power) currently covers only 7% of total electricity production in Europe. It cannot therefore be held solely responsible for the drastic fall in prices. The economic crisis and the significant overcapacity of production in Europe (especially at night) have largely contributed to the fall in market prices for electricity. In addition, the currently very low price of CO₂ emissions allows coal-fired power plants to make a profit by producing electricity at unbeatable prices, without having to worry about their impact on the climate. Coal now accounts for 45% of Germany’s electricity production; a paradox for the European leader in renewable energy!

The profitability of hydroelectric power plants is thus compromised, and the same is true for pumped storage plants, since they use the same production infrastructures. However, these are increasingly necessary as there is a need to provide increased storage capacity for fluctuating solar and wind power. While it is difficult to determine the respective shares of responsibility for these different effects, it is easy to find a remedy: increase the price of CO₂ emissions! [→ Q83].