why decoupling gas and electricity prices will not be so simple

« La flambée des prix de l

It’s a new chorus that has been looping for a few days. While the energy crisis is worsening on the Old Continent with prices exceeding 700 euros per megawatt hour (MWh) against around 50 euros in “normal” times, the culprit seems to have been found: the construction of the European electricity market ‘electricity. This one ” not can’t be described as functional if it leads to such high prices German Chancellor Olaf Scholz said on Monday. It even needs to be reformed. emergency “, have we engaged at the European Commission, yet at the origin of its liberalization. And this, in order to decouple the price of electricity from the price of gas “, and thereby bring the prices of electricity closer to its costs” real “, have claimed the French and Austrian governments.

Enough to give rise to strong hope: once the architecture of this market has been modified, the chaos should give way to a lull. However, in reality, no system could make it possible to dissociate the prices of gas and electricity on a European scale, in order to prevent the outbreak of the first from dragging the second down its course. And for good reason, the correlation is primarily linked to a physical reality: the production of electrons in Europe still largely comes from the combustion of gas, around 20%.

Worse: according to several experts, the uncontrollable surge in electricity prices in Europe can no longer be explained by the rise in gas prices, but rather by the fear of a shortage. ” There is now a risk of physical scarcity this winter, which is pushing some buyers to pay much more for their MWh to ensure delivery “says a connoisseur of the sector. In fact, if the prospect of power cuts were ruled out, the increase would be much lower on the markets, independently of gas prices.

The indexation of electricity on gas is explained by the real mix

First of all, you have to understand how this famous European system works. Broadly speaking, its role is to match demand and available production at all times. To do this, it lets the market define the price per MWh: this is adjusted to the cost of starting up the very last power plant connected to the network, which is generally the most expensive. However, it is often an installation running on fossil gas or coal, called upon as a last resort in Germany for example, and whose activation largely depends on the cost of the fuel used.

“The whole market adjusts to its price, because you have to pay the producer who starts it at time T, given that the electricity cannot be stored. If this were not the case, the producer would not be encouraged to put it into operation, despite an imminent need on the network”, develops Jacques Percebois, economist and director of CREDEN (Center for Research in Economics and Energy Law).

It is for this reason that the price of gas is currently reflected in that of electricity. ” But there is no clause which would determine a priori an indexation between gas and electricity. If the last plant called is nuclear or coal, the market will index to it “, continues the economist.

Lack of margins drives prices up

The rise in prices is therefore primarily due to two phenomena, which have fed each other in an infernal spiral: the start-up costs of gas-fired power stations (which balance this market) have soared, at the same time as the physical capacities for generating electricity have shrunk. France, for example, has closed many of its capacities, from the Fessenheim nuclear power station to polluting coal-fired power stations… without replacing them with equivalent means of production. Above all, the country is currently facing, at the worst possible moment, a historically low availability of its nuclear fleet, linked among other things to a corrosion defect affecting the EDF fleet.

“If France had enough nuclear and did not need to import, as it currently does, the price of its MWh would be set within its borders. In fact, a country that has a surplus production is not obliged to call on the famous European wholesale market”, stresses Jacques Percebois.

It cannot be said that the price of electricity in the whole of the EU is indexed to the price of gas, this is false. On the other hand, at certain times, if we do not have enough means of production on French territory to satisfy demand, we import electricity often from Germany, and we therefore suffer the price of electrictricity produced from coal or gas “, abounds a former senior executive of EDF.

Portugal and Spain did not decouple

For the prices of gas and electricity to be dissociated, it would therefore simply be necessary not to use gas to produce its electricity, both via its national mix and its imports. Spain and Portugal, which obtained a derogation a few months ago allowing them to post electricity prices much lower than their neighbours, have not operated such a decoupling. The two countries of the Iberian Peninsula have in fact acted directly on the price of said fuel, by subsidizing gas-fired power stations via an increase in consumer bills.

The State pays the difference between the market price and the one it has set, ie 40 euros per MWh. It is a cosmetic measure, which made it possible to avoid a runaway but will be temporary anyway “says Jacques Percebois.

There is nevertheless an alternative, which would make it possible to attenuate the day-to-day sensitivity of the price of MWh to that of gas. ” Rather than bidding on the basis of hourly marginal cost, which is very sensitive to gas prices and therefore very volatile, we could impose a sort of long-term marginal cost. Producers should therefore accept to lose some money when gas prices soar, and to recover some when they fall. », explains the economist. But this option would result in no magic disconnection between gas and electricity, since it would simply be a smoothing of the prices of the first over time.

It is nevertheless towards another option that the European Commission seems to be moving. According to initial leaks, the Brussels executive would liket in fact include a price cap per MWh for certain electricity producers whose production costs would be lower than those of gas-fired power stations. In other words, it would be a question of taxing part of the remuneration of nuclear power plants or wind and solar farms, in order to release resources to finance devices aimed at reducing energy prices for consumers.

Still, the perverse effects would be numerous. ” What we gain on one side in the short term, we risk losing on the other. Because nuclear or renewable facilities would recover their operating costs, but not the fixed costs, necessary to carry out the investments necessary for the energy transition », warns Jacques Percebois.

Especially since the efficiency risks being limited: in France in particular, the injection of renewable energies does not pass through the wholesale market, but through guaranteed prices fixed by ministerial decrees. In other words, it would be a question of taxing an otherwise subsidized industry, which participates at zero cost in auctions on the wholesale market.

Subsidize the last plant called

Another option exists: 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. ” Let’s imagine that we have three plants on a European scale, the operating costs of which are respectively 10, 20 and 50 euros per MWh. In the current system, if I need to call the three at a time T, the final price will therefore be aligned on 50 euros in order to be able to remunerate the last producer. In other words, the first two will benefit from an infra-marginal rent “.

However, in the alternative system, the market equilibrium price would not be 50 euros, but would be around the average of the marginal costs of the three plants called, ie a little less than 27 euros. ” However, the European Union should financially compensate the last producer [autrement dit, subventionne son gaz, ndlr], otherwise it will not start its electrical installation “, specifies the director of CREDEN.

Such a mechanism could therefore a priorimake it possible to attenuate the effect of soaring gas prices on the price of electricity on a European scale, without however disconnecting the two parameters.

There remains, finally, a radical possibility: to suspend the interconnected market on the scale of the Twenty-Seven. ” This would not prevent the national network operator from agreeing on over-the-counter electricity exchanges, but each country would organize its own auctions. “, explains a connoisseur of the sector. In this case, the price of electricity would be very different between the Twenty-Seven, since it would mainly depend on the mix of each country. But if one of them were to be sorely lacking in margins, as is currently the case for France, the bill could soar, and the risk of shortages worsen a little more.