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

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

As electricity prices continue to skyrocket in Europe, reaching levels unimaginable just a few months ago, the question is back on the table: is the interconnected energy market among the Twenty-Seven exacerbating the current crisis?

For the French government, which has never really adhered to this system, this is where the origin of the conflagration lies, at least in France. And not surprisingly, its operation would create an artificial coupling between gas prices, which have been skyrocketing around the world for more than a year, and those of electrons, even in countries where the current comes less from hydrocarbons than from nuclear or hydro.

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 peak […] 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 relies heavily on gas to produce electricity, has advocated 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 one ” structural reform of the electricity market they are now on the agenda, with a meeting of energy ministers scheduled for September 9 in Prague, we learned on Monday. But, would a change in the system really make it possible to stop the crisis?

Adjustment to the cost of the last plant called

Above all, you have to understand how this famous European market works. Specifically, its principle is to sell at marginal cost, that is, the prices per megawatt hour (MWh) depend on the cost necessary to start up the last plant called to cover the demand in each Member State, especially during peak hours. However, it is generally a fossil gas or coal-fired power plant, used as a last resort in Germany, for example, and whose activation depends largely on the cost of 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 T at the same time, the final price will therefore be aligned with 50 euros. In other words, the first two will benefit from an inframarginal rent, that is to say, a significant “gain”.and 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, therefore, all countries should suffer more or less the same increase regardless of their national mix (nuclear, hydraulic, gas, etc.), due to the rise in hydrocarbon prices, a paradox” aberrant “, according to the French economy minister, Bruno Le Maire.

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Public intervention to reduce marginal cost

Under these conditions, a path to improve the market is emerging, the implementation of which could mitigate the effects of the crisis. In fact, it would be a priori It is possible to base the price of electricity on an average of the marginal costs, instead of the hourly marginal cost of the last infrastructure put into operation. Going back to the example of the three plants, the market equilibrium price would therefore not be 50 euros, but would be established around the average of the marginal costs of the three plants called, that is, somewhat less than 27 euros.

“The income obtained by the first and the second would decrease drastically, so that collectively the consumer would pay less. And we would have to imagine a form of compensation for the third floor”, argues Jacques Percebois.

However, such a reform would require a partial departure 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 ensure the proper functioning of the European gas and electricity market. ;The more interventionist the approach, the greater the potential for market distortion “, he defended at the end of April in a long-awaited report. could actually curb private sector investment on innovative low-carbon technologies, necessary for the energy transition, he later argued.

European electricity market: regulators oppose the reform promised by France

Lack of Margins Leads to Decoupling

Especially since the increase in prices is not entirely attributable to the market. According to ACER, it is even the opposite: this interconnection system allows to obtain profits of 34,000 million euros per year on average, according to the organization, since it regularly prevents several countries from suffering 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, Germany, Belgium or the Netherlands tend to flirt. 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 the exchanges remain below 12 GW, the prices are balanced: the same happens on both sides of the border. But if we exceed them because we demand a lot of electricity from our neighbor due to lack of production, there is a decoupling of the markets”, explains a connoisseur of the sector.

In France, for example, nuclear production by 2022 is historically low due to a corrosion defect identified in the EDF fleet, leading to an unprecedented price explosion within the borders. ” France should be a net exporter of electricity, but it is the opposite: it imports massively, to the point of saturating interconnections “, says Jacques Percebois. So it is for this reason, and not because of the architecture of the market, that the country faces significantly higher prices than anywhere else in Europe, including Germany, which relies much more on gas to produce its operation.

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

Invest in means of production

In this sense, therefore, it is not the interconnected market that is responsible for the observed increase, but simply the 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 permanently depend on gas or coal-fired power plants to produce their electricity, the problem of price coupling between hydrocarbons and electricity would not arise. However, even in the height of summer (a period when consumption is low), these fossil power plants run at full speed. To get out of this vicious circle and mechanically lower prices, there is no secret: you need to invest in new means of production, even if they take several years to come out of the ground, or significantly reduce energy demand.

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