Brussels calls for “urgent” changes to the European electricity market

Brussels calls for "urgent" changes to the European electricity market

While electricity prices continue to soar in Europe, reaching levels unimaginable just a few months ago, the question is coming back to the table: is the interconnected energy market between the Twenty-Seven aggravating the ongoing crisis?

For the French government, which has never really adhered to this system, it is there that the origin of the conflagration is to be found, at least in France. And for good reason, its operation would create an artificial coupling between the prices of gas, which have exploded all over the world for more than a year, and those of electrons, including in countries where the current comes less from hydrocarbons than from nuclear or hydraulics.

Faced with this observation, the European Commission itself, although at the origin of the liberalization of this market, no longer seems convinced of its merits. ” The price spike […] clearly shows the limits of [son] current operation “, Argued on Monday its president, Ursula Von Der Leyen. Even the German Chancellor, Olaf Scholz (SPD), whose country depends largely on gas to produce electricity, pleaded in recent days for a substantial modification of the system, which ” cannot be described as functional if it leads to such high prices “.

Result: a emergency response ” and an ” structural reform of the electricity market are now on the agenda, with a meeting of energy ministers scheduled for Prague on September 9, we learned on Monday. But would a change in the system really make it possible to stem the crisis?

Adjustment to the cost of the last plant called

Above all, you have to understand how this famous European market works. In concrete terms, its principle is that of selling at marginal cost, i.e. the prices per megawatt hour (MWh) depend on the cost necessary to start up the very last plant called to meet demand in each Member State, particularly at peak times. However, it is generally a fossil gas or coal-fired power plant, used as a last resort in Germany, for example, and whose activation largely depends on the cost of the fuel.

“Imagine that I have three power plants, whose operating costs are respectively 10, 20 and 50 euros per MWh. If I need to call all three at a time T, the final price will therefore be aligned with 50 euros. In other words, the first two will benefit from an infra-marginal rent, that is to say from a “profit”, significantand the market price will be high », specifies Jacques Percebois, director of the Center for Research in Energy Economics and Law (CREDEN).

Thus, all electricity prices in the EU will be indexed accordingly, regardless of their origin. In theory, all countries should therefore more or less suffer the same increase regardless of their national mix (nuclear, hydraulic, gas, etc.), due to the surge in hydrocarbon prices, a paradox “ aberrant “, according to the French Minister of Economy, Bruno Le Maire.

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Public intervention to reduce marginal cost

Under these conditions, an avenue for improving the market is emerging, the implementation of which could mitigate the effects of the crisis. Indeed, it would be a priori possible to rely on an average of the marginal costs in order to set the price of electricity, rather than on the hourly marginal cost of the last infrastructure put into operation. Returning to the example of the three power stations, the market equilibrium price would therefore not be 50 euros, but would be established around the average of the marginal costs of the three power stations called, ie a little less than 27 euros.

“The rent obtained by the first and the second would decline sharply, so collectively the consumer would pay less. And we would have to imagine a form of compensation for the third plant, ”argues Jacques Percebois.

Such a reform would nevertheless require a partial exit from the logic of liberalization advocated by Brussels since the 1990s, and the appointment of a regulator, who would set the price. But this idea is rejected by the Agency for the Cooperation of Energy Regulators (ACER), which helps to ensure the proper functioning of the European gas and electricity market ;The more interventionist the approach, the greater the potential for market distortion “, she defended at the end of April in a highly anticipated report. It could indeed curbing private sector investment” in innovative low-carbon technologies, necessary for the energy transition, she then argued.

European electricity market: regulators oppose the reform promised by France

Lack of margins leads to decoupling

Especially since the surge in prices is not entirely attributable to the market. According to ACER, it is even the opposite: this interconnection system makes it possible to reap profits of 34 billion euros per year on average, according to the organization, since it regularly prevents several countries from making facing breakdowns.

Above all, it is clear that despite this single market system, prices vary significantly from one Member State to another: while France and Austria recorded prices of 800 or 900 euros per MWh on Monday, those Germany, Belgium or the Netherlands tend to flirt around 600 euros. And for good reason, the market is not “perfect”: if the crisis turns out to be more serious in certain countries, the national price moves away from the marginal cost defined at European level, due to congestion at the borders.

“When we establish the forecasts for the next day, we define the optimal exchanges between the countries, taking into account the interconnection capacities between the networks. If exchanges remain below 12 GW, prices balance out: the same is found on both sides of the border. But if we exceed them because we demand a lot of electricity from the neighbor because of a lack of production, a decoupling of the markets takes place”, explains a connoisseur of the sector.

In France, for example, nuclear production for 2022 is historically low due to a corrosion defect identified in the EDF fleet, which leads to an unprecedented explosion in prices within the borders. ” France should be a net exporter of electricity, but it is the opposite: it imports massively, to such an extent that the interconnections are saturated “, notes Jacques Percebois. It is therefore for this reason, and not because of the architecture of the market, that the country faces significantly higher prices than elsewhere in Europe, including Germany, which is much more dependent on gas to produce its running.

“Let’s imagine that we have enough nuclear units in France to satisfy all of the citizens’ demands. Even if the electricity markets remained interconnected, the price of electricity in France would then be much lower,” underlines a former senior EDF executive.

Invest in means of production

In this respect, it is therefore not the interconnected market that is responsible for the observed surge, but quite simply a lack of physical infrastructure. In fact, the real mix inevitably has an impact on the price of electricity, whatever the structure of the market.

In other words, if the countries of the European Union did not have to rely permanently on gas or coal-fired power stations to produce their electricity, the problem of price coupling between hydrocarbons and electricity would not arise. However, even in the middle of summer (a period when consumption is low), these fossil power plants are running at full speed. To break out of this vicious circle and mechanically lower prices, there is therefore no secret: it is necessary to invest in new means of production, even if they will take several years to emerge from the ground, or to reduce significantly the energy demand.

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