Brussels recognized the “Iberian exception” and authorized Spain and Portugal to regain their electric autonomy by temporarily leaving the European tariff system. Why is this exception possible and what are the consequences for companies and consumers? Could it be extended to other countries in the Union where the price per MWh has reached stratospheric levels? On Friday August 26, we exceeded the bar of 1,000 euros per MWh in France!
Formerly reserved for national monopolies providing 100% of production and distribution, the European electricity market was opened up to competition in 1996. Initially reserved for manufacturers, it was extended to all individuals in 2007 The competitive market means that throughout the European Union, any public or private company can freely sell MWh and that any company or individual can freely choose its supplier. In other words, and within technical limits, the electron which once stopped at borders can now circulate freely in the European network. This free market has de facto induces a rule that may seem a priori debatable but which, in a free market, is nevertheless unavoidable: the merit order or marginal source rule.
The rule of merit order
the merit order establishes an order of priority in the implementation of the various electricity production units (coal, fuel oil, gas, hydraulic, nuclear, renewables). Every half hour, they are called in ascending order of their marginal cost, starting with the least expensive to the most expensive. For each half-hour, the price is based on that of the last production unit requested (ie the most expensive). Indeed if the price of the last source could not be guaranteed, its producer would never implement it. This was obviously not the case before the opening of the European market: each country had a natural monopoly (EDF in France) which alone managed all the sources and could then offer the consumer an average price. With a deficit on the last source, it could compensate for its losses on the least expensive sources. In the current system of multiple and competing suppliers, the producer of the last source (gas: insofar as it takes on average 3 MWh of gas to produce one MWh of electricity, a gas that has exceeded 300 €/MWh leads to a MWh of electricity close to €1,000) is only profitable at the margin. The others, on the other hand (renewables, hydroelectricity and nuclear), reap super profits on the back of the consumer. As for the latter, his only satisfaction is not to suffer a blackout. In a way, he pays a high price for a kind of all-risk insurance without deductible.
the merit order is more a rule necessary for free competition than for the existence of a European market. Indeed, even with a completely isolated national electricity network, an internal free market cannot be extricated from the merit order while guaranteeing a “zero black-out”. To be completely free of it, two conditions are necessary: on the one hand to have the national capacity to disconnect from the European network, on the other hand to return to a national monopoly without competition. One could also imagine a European supranational monopoly regulating electricity throughout the European Union. However, given the major differences between the member countries (both in terms of mixes and taxation), such a model seems totally utopian.
France has become a major electricity importer
The solution chosen by Spain and Portugal only covers one of the two conditions listed above. Compared to its European counterparts, the Iberian Peninsula is an “electric peninsula”: only the 650 km of French border can exchange electrons with the European Union. This limitation of exchanges forced the two Iberian countries to develop more national electricity strategies. Compared to its neighbors, Spain enjoys better sunshine conditions (22% load rate, compared to 14% in France) and wind (25%). It has a very balanced electricity mix with 37% solar and wind supported by 63% controllable, including 25.4% gas and 20.8% nuclear. Importing virtually no Russian gas, it has the largest regasification park Europe (7 terminals in Spain and one in Portugal), which enables it to import much more liquefied natural gas than its neighbours.
France having become an importer of electricity in recent months following the shutdown of many of its nuclear reactors, trade between the Iberian Peninsula and the European Union had been reduced to a trickle in recent month. Continuing to suffer merit order without being able to benefit from the import guarantee in case of necessity, Spain and Portugal have been authorized by Brussels to leave the European tariff system and to temporarily become an “electric island”.
But this new status often presented as a simple political will does not protect Spain and Portugal from the rule merit order which will continue to apply within a restricted perimeter of the two Iberian countries. Independent of any trade on the European grid, there is indeed a free electricity market within the Iberian Peninsula with multiple public and private players. To bring down electricity prices, Madrid and Lisbon have no choice but to subsidize gas to limit the price of electric MWh. A high-cost operation: reducing the price of gas by €100 (and therefore that of the electric MWh by €300) would cost, on an annual basis, almost €20 billion in Spain alone. Part of this operation should be financed by non-gas operators (renewables in particular) reaping super profits.
Ikea, owner of four wind farms in France and six parks in Germany, is reaping super profits
Having become a heavy importer of electricity in recent months following the closure of its nuclear reactors, France has no interest in leaving the European electricity system today: for several weeks, France has been importing 20% of its electricity from its European neighbours. Such a decision would have disastrous consequences in the months to come. And even in the medium term, the European grid is, for France and for its neighbours, the guarantee of a secure supply.
The immediate solution would ultimately be to apply the Hispano-Portuguese strategy on a European scale: subsidize gas to bring down the marginal price of the gas MWh and call for solidarity from non-gas electricity producers who are reaping super profits today on European territory. These non-gas producers making super profits are not necessarily the ones we believe. Thus, the furniture manufacturer Ika, owner of four wind farms in France and six parks in Germany, is in the process without saying it of reaping super profits. Where the French thought they were saving on the price of their furniture, they return it a hundredfold to the Swedes by paying for their electricity at a high price.