European Commission President Ursula von der Leyen used her first speech after the summer break to promise measures to curb Europe’s high wholesale electricity prices that are wrecking the finances of households and businesses in Europe. the whole block.
She promised a short-term intervention, something that could “trigger very quickly, in weeks maybe,” and Announced a longer-term “structural reform of the energy market”.
How does the EU energy market work and why are prices so high?
european energy Prices are set through a so-called marginal pricing system in which the most expensive power plant called to meet demand on a given day sets the wholesale electricity price for all providers. This means that gas-fired power plants, which are still needed to keep the lights on in many countries, tend to dictate the price of wholesale electricity for the rest of the market, even though renewable energy can be produced at a lower price. bass.
Historically, there was little desire to overhaul the system, even as the share of clean energy in the energy mix increased. Higher wholesale electricity prices were expected to incentivize green energy development by increasing the profit margin of lower-cost renewable energy projects.
But as gas prices soared to record levels this year, largely due to Moscow’s decision to cut supplies to Europe, the cost of electricity has also been dragged down. Therefore, more legislators are calling for a new approach that allows cheaper renewable energy to be sold at a lower price. Polish Prime Minister Mateusz Morawiecki said on Tuesday that proposals to change the structure of the market “are falling on increasingly fertile ground.”
The UK government launched a consultation in July on the decoupling of gas prices and renewable energy. The pressure is now mounting in Brussels.
What can the EU do to reduce costs for consumers and industry?
Commission Officials say options under discussion include a price ceiling for gas, detailed guidance pushing EU capitals to impose extraordinary taxes on energy companies that could be used to support vulnerable consumers, and a temporary separation of gas and electricity prices before a longer-term decoupling. .
Another option is to demand cuts in electricity demand in line with what is currently a voluntary 15 percent cut in gas consumption agreed by EU energy ministers in July.
These measures would come on top of efforts to find alternative supplies (the bloc has replaced about a fifth of its natural gas supply from Russia with fuel from other countries) and investment in renewable energy.
What are the risks?
The EU’s energy agency, Acer, has warned against dismantling the market structure. In an April report, it said the EU’s wholesale electricity markets are working well under normal conditions, ensuring a secure electricity supply.
Instead of breaking current arrangements, he suggested there could be a “temporary relief valve”. This would limit electricity prices automatically if there are sudden spikes, under pre-defined conditions, for example unusually high price increases in a short period of time.
William Peck, an energy market analyst at ICIS, a commodity analysis firm, also warned against reviewing a mechanism that had worked well for decades and still served as an incentive for much-needed investment in clean energy.
Politicians were focusing on electricity market reform because they had been unable to find a quick and sufficient alternative to Russian gas, he said. “If it were me, I would really be focusing my energy on the gas supply part of this equation and not tearing apart a market 20 to 30 years from now.”
What can we learn from the Spanish and Portuguese price cap experiment?
Portugal and Spain reached a political agreement with the European Commission in April that allows them to limit the price of natural gas used in power plants, thus decoupling electricity and gas prices. The measure came into force in May and will last for one year with an average cap of €48.80 per megawatt hour.
The subsidy of 8,400 million euros that the Iberian countries will pay to the gas companies will be recovered to a great extent with the charges to the electricity distributors who benefit from the cap price.
The European Commission granted what is known as “the Iberian exception” from state aid rules because its electricity bills are heavily linked to wholesale energy prices. They have limited energy connections with the rest of the EU, which makes the Iberian Peninsula an “energy island”. Brussels has also argued that the move will allow the two countries to expand green energy production.
Spain states that between June 15 and August 15 the price of electricity had been €49.85 per megawatt hour cheaper than it would have been had the price cap mechanism not existed, thus saving consumers around €1,400 million.
But the amount of gas used for electricity rose 17 percent between January and July 2021 to 23 percent in the same period this year. Madrid said this was due to the summer drought, which has affected hydroelectric plants.
Peck at ICIS said expanding such a mechanism across Europe could similarly increase demand for gas by making it artificially cheap. “That’s the exact opposite of what we needed to be doing.”
While von der Leyen said the commission would find solutions “within weeks,” officials say the proposals are unlikely to be tabled in time for a meeting of EU energy ministers on September 9, but they can be described. in your state of affairs. Speech of the Union before the EU parliament on September 14.
Georg Zachmann of Bruegel’s think tank said it was hard to imagine a solution to quickly lower wholesale prices without causing market chaos. “There are a lot of things you can undermine by playing with the design of the market,” he said.
The tax system was a better mechanism to deal with the short-term problem of high prices, he argued, as a windfall tax on electricity producers that could be funneled to consumers.
Additional reporting by Peter Wise in Lisbon
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