There is an urgent need to reform the electricity price mechanism in Europe. Consensus is now almost complete in the EU as wholesale energy prices hit new records today, raising the specter of skyrocketing bills for consumers.
Ursula von der Leyen, president of the European Commission, has thus promised “a structural reform of the European electricity market” designed in the 1990s. Changes, long demanded by France, which will be on the menu at a meeting of energy ministers in the EU on September 9 in Brussels.
“The rise in electricity prices clearly shows the limits of the current functioning of the market, which had been designed in a very different context”, underlines the manager.
Electricity prices in the wholesale market follow those of raw materials. They are, therefore, in line with the rise in gas prices, which today provides 20% of the European Union’s electricity production, but also with the increase in the price of a ton of CO2 in the European carbon market.
As a large part of the electricity in the European Union of 27 is produced with fossil fuels (almost 20% with gas and 13% with coal), any increase in the prices of gas, coal and CO2, has an impact mechanic in the cost of electricity production.
As electricity cannot be stored, its price is determined in Europe by the costs of the last activated plant called to ensure the balance between supply and demand and, therefore, most of the time a thermal plant that works with coal or gas. This is called selling at marginal cost.
This marginal cost skyrocketed in concert with the increase in gas prices linked to the drastic drop in Russian gas deliveries to Europe, in the context of the war in Ukraine.
The paradox is even more significant in France, where the electricity mix is almost 90% carbon-free and where prices have followed and even exceeded those of other European markets. The shutdown of 32 of EDF’s 56 nuclear reactors, in particular due to corrosion problems, explains France’s recourse to the European wholesale market.
• Should we go to average marginal costs?
While most EU countries agree that the system is failing, the arenas for new mechanisms ultimately remain relatively few.
One of the ways would be to rely on an average of the marginal costs instead of the marginal cost of the last commissioned thermal infrastructure. This would smooth purchase prices and thus reduce the consumer’s bill.
but how do you remember The galery, this idea is rejected by the Agency for the Cooperation of Energy Regulators (ACER), which highlights a risk of distortion of competition. Such a device could “stop private sector investment” in innovative low-carbon technologies, according to this agency.
In addition, it would be a mostly cyclical measure, as Quentin Guillet-Thomé, an Oresys consultant, explains: “It is a path that should not be completely ruled out, but it is not structural in terms of reform. Thresholds will also have to be defined so that everyone finds their account in all circumstances and it is difficult to start up.
• Should a maximum European price be set and gas and electricity unlinked?
This is the idea defended in particular by the Belgian Prime Minister, Alexander De Croo. He believes that it is necessary “to intervene and regain control of the market (…) setting a maximum (wholesale) price that we are willing to pay for gas and electricity”, a price set by the European Union.
Therefore, it would be a question of maintaining a reasonable price of “decoupling the price of electricity from that of gas” as requested by Greece, Italy, Austria and France.
According to the Austrian chancellor, this dissociation will be on the menu of the day’s talks. Greece thus proposes dividing the electricity markets in two, putting renewable energies, nuclear and hydroelectric, in a first basket, and fossil fuels in a second.
In return, the Member States could “reap additional financial income” (different in each country depending on their energy mix), which they could use to support the most vulnerable consumers: direct aid, regulated rates, reductions in the electricity bill .
• Should supply methods be reformed?
In their purchases and sales of electricity, member countries can opt for the “spot market” that allows the purchase or sale of electricity for delivery the next day or the same day or the “futures” market that allows to secure volumes for more weather. periods (up to three years) with monthly, quarterly or annual deliveries.
In a column published by The worldlawyer Guillaume Dezobry and energy transition expert Pierre-Albert Langlois believe that “the European Commission and Member States have given spot and futures markets a disproportionate role: by making them the focal point of the electricity system, this has caused malfunctions that can be corrected”.
They advocate the implementation of “Power Purchase Agreements” (PPA for electricity purchase contracts) which are purchase contracts concluded directly between a producer and a consumer or a supplier, generally long-term and at a fixed price.
• Should regulated rates be generalized?
This is one of the ways of the European Commission with dissociation. “Less than half of the states use regulated rates, while direct income support remains the most used instrument in the EU to support households,” says Brussels in a preparatory document.
The Commission wants to “provide a greater degree of legal certainty to extend the regulated tariffs (…) in particular with the possibility of a clear exception (to European rules) to cover also SMEs”.
On the other hand, the European Executive declares itself against an indiscriminate cap on retail prices for all consumers, “an interventionist political measure that risks distorting the markets” and costing the States dearly. “As soon as we define slices, we have a gas plant,” estimates Quentin Guillet-Thomé.
• What schedule?
The reform now “is on the right track (…) We are at such a price peak that it opens up a political space”, although a reform will not necessarily be “spontaneously agreed”, observes a European diplomat. “The Commission should launch an impact study in the fall, we can expect a proposal early next year,” he said.
• Insufficient reforms?
For some experts, the reform of the European price mechanism will only have marginal effects. The heart of the problem would be above all physical. To reduce the influence of fossil fuels on the price of electricity, it would be necessary simply but massively to invest in new means of production considered green.
Problem: the distortion between, on the one hand, the urgency of the situation and the very long time needed to deploy these new sources of production. “Short-term measures must allow us to satisfy demand, that is the first challenge, that is the first need,” adds the consultant.
Source: BFM TV
