As electricity prices break records in the European Union, leaders have asked the European Commission to work on the reform of a system they describe as failing in order to decouple gas prices from those of electricity.
The European electricity market sets the price of electricity according to the most expensive source of electricity in the mix. Soaring gas prices have led to soaring electricity prices, prompting calls for reform.
In May, EU leaders instructed the EU executive to work ” rapidly “ optimization of electricity markets.
At the emergency meeting on Tuesday (26 July), Greece presented its proposal to split the electricity markets in two, putting renewable energies, nuclear and hydroelectricity in a first basket, and in a second fossil fuels.
“The mechanism I am proposing would be broader, covering demand reductions over several months rather than hours or days”Greek Prime Minister Kyrios Mitsotakis said in a letter to Commission President Ursula von der Leyen.
“To work, this tool would need to combine elements of energy market design — when, how much, for how long — and a way to fairly reward industry”he continued.
But the Greek proposal was hotly contested by experts.
“The proposal consists of going back to the very idea of the electricity markets on which we have worked for the past 25 years in Europe”said Lion Hirth, professor of energy economics at the Hertie School from Berlin.
“Demand-side price signals would be highly diluted, so forget about demand-side flexibility”he told EURACTIV.
Proponents of a redesign against free market orthodoxy
A representative from Romania said that his country was in favor of optimizing the design of the EU market “in order to limit the fallout [de la hausse] gas prices on electricity ».
The Greek proposal was quickly supported by Italy. “We totally support the idea, especially this type of decoupling”, said Roberto Cingolani, Italian Minister for Ecological Transition. For Cyprus, the Greek solution “deserves consideration”.
The French Minister for Energy Transition, Agnès Pannier-Runacher, said to herself “very interested in this proposal”, promising a future proposal as an informal document. German Economy and Climate Action Minister Robert Habeck thanked the Greeks for the proposal “interesting” who “worth discussing”.
Teresa Ribera, Spain’s Minister for Ecological Transition, said that “how to make the market work in exceptional circumstances and the debate on how the market evolves are two very important questions”.
Others were much less enthusiastic about an overhaul of the electricity market.
“If only the supporters of price caps in the room are speaking, it must still be understood that there is a group of countries which have always defended the internal electricity market and which know its value”explained Claude Turmes, Luxembourg’s Minister for Energy.
According to him, the internal electricity market is a considerable asset and we should not “throw the baby out with the bathwater”.
Denmark also criticized the proposal. “We really need to make sure that we don’t make decisions that will have long-term negative consequences and that will ruin a system that is crucial for the ecological transition”explained Dan Jorgensen, Danish Minister of Energy.
The Commission’s Burden
“I can assure you that the Commission is very keen to have an open and thorough discussion with all stakeholders and Member States on any suggestions to improve the EU electricity market”said EU Energy Commissioner Kadri Simson.
Thanks to the mandate of the European Council, the Commission “will carry out a full impact analysis of all options”she continued.
However, with the April report from the European Union Agency for the Cooperation of Energy Regulators (ACER) concluding that the market was working as expected, the options to be assessed “will be much larger than what Kostas [Skrekas, le ministre grec de l’Énergie] presented here »said the head of the European executive.
She explicitly mentioned contracts for difference, which cap revenues in exchange for price stability, other types of long-term contracts, direct contracts with service producers which could benefit certain categories of consumers and the evolution towards a model of “more granular local pricing”, we mean “more precise”.
According to this pricing model, the cost of electricity in a given area would be linked to its local availability.
In Germany, for example, where there is currently only one tender zone for electricity, although electricity is much cheaper to produce in the north than in the south due to the abundance of renewable capacity, the market would be split, meaning residents in the north of the country could pay half of what those in the south pay for the same units.
The EU commissioner said the impact assessment of the options will be presented next October, while a legislative proposal is expected to be presented next year.