The European Union is working on proposals designed to decouple gas prices and renewable energy prices in what could be a major overhaul in the bloc’s power market amid an unprecedented crisis. Some EU member states are pushing for market reforms that would more adequately reflect the lower cost of renewable power generation. Spain and France, for example, a large renewable energy producer and a top nuclear energy producer in Europe, respectively, have been advocating for a decoupling of gas and renewable power prices. The renewable energy industry, for its part, warns that emergency market interventions shouldn’t be mixed with long-term structural policy measures designed to help the bloc reach climate neutrality by 2050. The industry is also wary of ideas of windfall taxes and warns against policies that could stifle longer-term investment plans for low-carbon energy sources.
Marginal Pricing
Currently, the EU electricity markets work according to the marginal pricing model, or the so-called ‘merit order principle.’ This means that the most expensive energy source sets the overall price paid for electricity in wholesale markets at day-ahead auctions. For most of 2022, the most expensive energy source in the EU was natural gas as prices spiked to records following the Russian invasion of Ukraine, the subsequent EU rush to procure alternatives to Russian pipeline gas, and the cut-off of most of the gas flows from Russia to many EU countries.
Per the current EU electricity market provision, marginal pricing has the advantage of being relatively transparent and applicable across national energy markets. Moreover, this type of pricing encourages the production of lower-cost energy from renewable and low-carbon sources, which are remunerated for their electricity production at price levels set by costlier fossil fuels.
“However, in the current energy crisis, marginal pricing means that wholesale electricity prices are largely set by the price of gas (although in some countries the marginal fuel source is coal),” the European Parliament said last year.
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“This means consumers are paying far more for their electricity than is justified by the cost of production, especially in Member States where most electricity is generated by nuclear energy and/or renewable energy sources.”
EU ‘Under Pressure’ To Overhaul Power Market
The European Commission is under “very strong political pressure” to overhaul the market to cut the soaring bills for consumers, Energy Commissioner Kadri Simson told the Financial Times.
The EC is working on proposals that could be unveiled at the end of this winter, at some point in the first quarter.
Those proposals would be designed how to bring the “benefits of a larger share of renewables” to consumers, Simson said.
A draft proposal seen by FT suggests that the Commission could offer to extend the windfall tax on renewable energy companies, with proceeds from the levy passed on to EU consumers.
However, such proposals and a market reform during an energy crisis could undermine the long-term investment plans of renewable energy firms and their long-term plans to bring more clean energy online, renewable industry executives say. Accelerating the rollout of renewables is essential to cutting off reliance on Russian energy and meeting the EU climate goals.
Renewable Energy Industry Wary Of Rushed Market Reforms
“Talking about reworking the electricity market to sweat out any imagined margins is the wrong thinking at a very critical moment,” Ulrik Stridbæk, Head of Regulatory Affairs at Denmark’s renewable energy giant Ørsted, told FT.
Even with the current strong growth in renewable energy deployment, the EU is unlikely to reach the targets in its REPowerEU plan in the electricity, transport, and heating sectors, the International Energy Agency (IEA) said in a report last month.
“Although the use of renewable energy does increase in all three of these sectors by 2027 in our main-case forecast, in none of them are levels consistent with the REPowerEU plan,” the IEA noted.
“To enable further increases, governments across the European Union will need to minimise policy uncertainty, simplify permitting procedures and accelerate transmission and distribution network upgrades,” according to the agency.
The WindEurope association says that proposals to overhaul Europe’s Market Design must send the right investment signals to deploy wind at scale, guarantee energy security, and ensure the cost-effective management of a fully decarbonized energy system.
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Per Eurelectric, the federation of the European electricity industry, while the REPowerEU plan “represents a strong signal in the right direction,” such signals “risk being offset by uncareful emergency measures adopted to tackle the price surge.”
“The uncoordinated implementation of temporary emergency measures across EU countries seriously harms integrated internal electricity market, causing concerns for investment. The current patchwork of revenue caps on low-carbon technologies is a case in point as it is raising uncertainty and undermining investors’ appetite for much-needed renewable and low-carbon infrastructures,” Eurelectric said last month.
According to the federation, purchasing power agreements (PPAs), the most common agreements for renewable projects, are now in decline.
“Decoupling electricity from gas, as suggested by the “Greek Model” now under discussion, would trigger a huge multiyear gap in investments because nobody would know how it works,” Eurelectric’s Secretary General Kristian Ruby said.
By Tsvetana Paraskova for Oilprice.com
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