Europe: why delinking gas and electricity prices will not be so easy

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It is a new choir that has been playing for a few days. While the energy crisis worsens in the Old Continent with prices exceeding 700 euros per megawatt hour (MWh) compared to around 50 euros in “normal” times, it seems that the culprit has been found: the construction of the European electricity market ‘electricity ‘. East ” No cannot be described as functional if it leads to such high prices German Chancellor Olaf Scholz said on Monday. It even needs to be refurbished. emergency “, we have committed ourselves in the European Commission, however, at the origin of its liberalization. And this, in order to delink the price of electricity from the price of gas “, and thereby bring electricity prices closer to their costs” real “, have claimed the governments of France and Austria.

Enough to generate strong hope: once the architecture of this market has been changed, the chaos should give way to a pause. However, in reality, no system could make it possible to decouple gas and electricity prices on a European scale, to prevent the explosion of the former from dragging down the latter. And for good reason, the correlation is mostly tied to a physical reality: Europe’s electron production still comes largely from gas combustion, about 20%.

Worse still: according to several experts, the uncontrollable increase in electricity prices in Europe can no longer be explained by the rise in gas prices, but by the fear of shortages. ” There is now a risk of physical shortages this winter, which is pushing some buyers to pay much more for their MWh to guarantee delivery. says a connoisseur of the sector. In fact, if the prospect of power outages were ruled out, the increase would be much smaller in the markets, regardless of the price of gas.

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

First of all, you have to understand how this famous European system works. Broadly speaking, its function is to match the demand and production available at any given time. To do this, it lets the market define the price per MWh: it is adjusted to the start-up cost of the last plant connected to the grid, which is usually the most expensive. However, it is often a facility that runs on fossil gas or coal, used as a last resort in Germany, for example, and whose activation depends largely on the cost of the fuel used.

“The entire market adjusts to its price, because you have to pay the producer who starts it at time T, given that 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 Energy Economics and Law).

That is why currently the price of gas is reflected in that of electricity. ” But there is no clause that determines a priori an indexation between gas and electricity. If the last called plant is nuclear or coal, the market will index it “, continues the economist.

Lack of margins drives up prices

The rise in prices is therefore mainly due to two phenomena, which have fed each other in an infernal spiral: the start-up costs of gas-fired power plants (which balance this market) have skyrocketed, at the same time as physical capacities to generate electricity have been reduced. France, for example, has shut down many of its capacities, from the Fessenheim nuclear power plant to polluting coal-fired power plants… 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 power 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 of production is not obliged to resort to the famous European wholesale market”, emphasizes Jacques Percebois.

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

Portugal and Spain did not disassociate themselves

For the prices of gas and electricity to be decoupled, it would simply be necessary, therefore, not to use gas to produce its electricity, both through its national mix and its imports. Spain and Portugal, which a few months ago obtained an exception that allowed them to publish much lower electricity prices than their neighbors, have not operated such a decoupling. In fact, the two countries of the Iberian Peninsula have acted directly on the price of said fuel, by subsidizing gas power plants through an increase in consumer bills.

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

However, there is an alternative, which would make it possible to attenuate the daily sensitivity of the MWh price to that of gas. ” Instead of bidding on an hourly marginal cost basis, which is very sensitive to gas prices and therefore very volatile, we could impose a sort of long-run marginal cost. Therefore, producers should accept losing some money when gas prices spike and get some back when they drop. », explains the economist. But this option would result in no magic disconnect between gas and electricity, since it would simply be a smoothing of the prices of the former over time.

However, it is towards another option that the European Commission seems to be moving. According to the first leaks, the Brussels executive would likeIn fact, include a maximum price per MWh for certain electricity producers whose production costs would be lower than those of gas-fired power plants. In other words, it would be a matter of taxing part of the remuneration of nuclear power plants or wind and solar farms, in order to free up resources to finance devices designed to reduce energy prices for consumers.

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

Especially since efficiency risks being limited: in France in particular, the injection of renewable energy does not go through the wholesale market, but through guaranteed prices set by ministerial decrees. In other words, it would be a matter of taxing an industry that would otherwise be subsidized and that participates at zero cost in wholesale market auctions.

Subsidize the last plant called

There is another option: 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. ” Let us imagine that we have three plants on a European scale, whose operating costs are respectively 10, 20 and 50 euros per MWh. In the current system, if I need to call all three T at the same time, the final price will therefore line up at 50 euros in order to remunerate the last producer. That is, the first two will benefit from an inframarginal income “.

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, that is, slightly less than 27 euros. ” Nevertheless, the European Union should financially compensate the last producer [autrement dit, subventionne son gaz, ndlr], otherwise it will not start your electrical installation “, specifies the director of CREDEN.

Therefore, this mechanism could a priorithey make it possible to attenuate the effect of the increase in the price of gas on the price of electricity on a European scale, without thereby 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 grid operator from agreeing to OTC electricity swaps, 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 among the Twenty-seven, since it would depend mainly on the mix of each country. But if one of them were very short of margins, as is the case in France today, the bill could skyrocket and the risk of shortages worsen a little more.