we explain to you why the EU wants to reform the European electricity market, the price of which depends on that of gas

we explain to you why the EU wants to reform the European electricity market, the price of which depends on that of gas

In a few years, how will electricity prices be determined within the European Union? The question, as technical as it is political, agitates the Twenty-Seven at the time of an energy crisis which affects all its members. Monday August 29, from Slovenia, Ursula von der Leyen announced a “emergency intervention and structural reform of the electricity market”. For the President of the European Commission, “the surge in electricity prices clearly shows the limits of the current functioning of the market”.

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The reform, called for by Ursula von der Leyen, will be on the menu of a meeting of EU energy ministers on Friday, September 9, in Brussels (Belgium). It promises to be fiercely debated between the different Member States. How does the European electricity market work? What reform is envisaged? Franceinfo takes stock of a small revolution that Europe could lead to limit the consequences of the war in Ukraine.

The price of electricity explodes because it is indexed to that of gas

Designed in the 1990s, the wholesale electricity market is based on the following mechanism: it is the cost price of the last source of production mobilized to balance the supply and demand of electricity, generally power stations gas, which determines the price charged to all operators. In other words, po balance the supply and demand of electricity, we are interested in the cost necessary to produce an additional megawatt-hour (MWh), in order to satisfy a growing demand. This is called marginal cost. However, it is thermal, gas-fired power stations that must be mobilized when demand is high. This is why the price of electricity is correlated to the price of gas.

In the context prior to the Russian gas shortages, the price of electricity from gas was very low. Therefore, the electricity price itself was rather low. Renewable energies have been able to take advantage of this system to develop without their cost, initially very high, slowing down their rise in power.

From now on, renewable energies produce electricity at low cost, while gas has seen its price soar, due to the drop in Russian deliveries. The price of electricity, largely indexed to gas, therefore soared: at the end of August, its price for delivery at the start of 2023 reached 950 euros per megawatt hour in Germany. In France, the bar of 1,000 euros has even been crossed, against 85 euros on average at the end of summer 2021.

Several countries, including Germany, have recently resolved to reform

France has been calling for a reform of a system judged for a year “obsolete” which prevents French consumers from fully benefiting from the low costs offered by nuclear energy. In Spain, the government also complains of having to pay prices aligned with gas while the country has massively invested in renewable energies.

A dozen countries in the north of the EU, such as Germany, were still opposed to any reform, in the fall of 2021. They have since converted to it. The market “cannot be described as functional if it leads to such high prices”recently lambasted German Chancellor Olaf Scholz.

Several avenues of reform are mentioned

Apart from Spain and Portugal, authorized to impose a cap on energy prices because of their weak connections to European networks, EU countries are currently complying with the rules of this European market.

Several avenues are being discussed today for this reform of the European electricity market. First, countries like France and Austria advocate the solution of decoupling, ie a forced disconnection of the price of electricity from that of gas. This would, for example, allow French consumers to benefit from cheaper electricity thanks to nuclear power, even if 32 of the 56 French reactors are currently shut down.

The Czech Republic, which holds the rotating presidency of the EU, is proposing “a cap on the price of gas intended to produce electricity”while Belgium claims rather “a price freeze” electricity.

The debate within the EU can last several months

This is where the shoe pinches. A reform will not be “spontaneously consensualaccording to a European diplomat quoted by AFP. The Commission should launch an impact study in the autumn, we can hope for a proposal early next year”, according to him. Debate “will last several months, even up to two years in the event of legislative proposals”anticipates Nicolas Berghmans, expert at theInstitute for Sustainable Development and International Relations (Iddri), quoted by AFP.

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