Tuesday, October 19, 2021
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The EU electricity market and why soaring gas prices drive up bills

The soaring cost of gas has raised energy bills in Europe and put the EU electricity market in the spotlight.

The way prices are set has been criticized not only by member states, with Spain and France leading calls for changes to protect consumers from rising costs, but also by Russia, where President Vladimir Putin blames the increase. from gas prices in part to the EU’s decision to phase out. long-term contracts in favor of market prices.

The European Commission, however, has resisted pressure for major regulatory changes in the EU energy market for 30 years. Brussels has published a “toolbox” of options for dealing with rising prices, such as direct income support and tax breaks, but is stepping back from promising a radical overhaul of price rules.

Kadri Simson, EU energy commissioner, has championed the system to pave the way for market liberalization and encourage investment in green technologies.

Why is the price of electricity going up?

The average electricity bill of European households is broken down into costs of taxes and VAT (around 35 percent), network operator costs (30 percent) and unit cost of energy (around 35 percent), according to EU figures. Agency for the Cooperation of Energy Regulators (ACER).

At the center of complaints in some countries is the EU’s energy pricing system, which operates on a common “pay-as-you-pay” model in which wholesale electricity costs reflect the price of the last unit of energy purchased through auctions held in the member states.

Generally, gas is the fuel that is needed to ensure that enough energy is supplied to meet demand.

So even in countries like France, where the cheapest nuclear power provides about 70 percent of electricity, gas continues to drive the wholesale price of electricity. And as the price of gas has skyrocketed, so has the price of electricity.

Who benefits from the functioning of the market?

The EU energy market has helped drive down prices across Europe since the late 1990s by accelerating the shift from long-term contracts for fossil fuels such as oil to less carbon-intensive natural gas and renewables purchased from spot markets.

Because prices are based on changing supply and demand dynamics, Europe has even experienced negative prices, especially during the start of the Covid-19 pandemic in 2020, when supply greatly outpaced the drop in demand. Between 2019 and 2020, European households experienced a 20 percent drop in the cost of gas, according to Eurostat figures.

Jan Cornillie, associate researcher at the European University Institute, said the EU energy market has “offered very low prices for years”, but a recent confluence of factors, largely beyond the control of policy makers, means that “this It is one of the first times that I have not been working in our favor ”.

“The lesson is not to eliminate design entirely, but to add insurance mechanisms in times of high prices,” Cornillie said.

Brussels is also fiercely protective of a model it says is crucial to meeting its ambitious climate goals and accelerating the transition to renewables.

The marginal price means that all suppliers on the market, including the cheapest wind or solar installations, get the price paid for the most expensive offer accepted, which provides an advantage for capital-intensive technologies, such as renewable energy. “The market is not dominated by the big players and is open to smaller renewable installations,” Simson told the Financial Times.

Is there an alternative?

The finance ministers of France, Spain, Romania, Greece and the Czech Republic have called for radical changes to “better establish a link between the price paid by consumers and the average cost of electricity production in national production mixes.”

The commission is committed to assessing how this possible “disengagement” could be achieved.

EU Energy Commissioner Kadri Simson

EU Energy Commissioner Kadri Simson said the system has paved the way for market liberalization and encouraged investment in green technologies © AFP via Getty Images

But the appetite for radical changes is low. Changing marginal pricing rules would also require time-consuming EU legislation. Many member states, including Germany, the Netherlands and the Nordic countries, are likely to resist major legal changes in the face of a price hike that experts say is expected to disappear by early 2022.

“To the extent that [the price surge] it is a temporary phenomenon, so the response should be just as transitory ”, Christian Zinglersen, director of ACER, told the FT.

Would improving energy reserves make a difference?

One solution Brussels is working on is finding ways to boost the EU’s ability to acquire and store natural gas so that it is available to smooth out price swings at times of high demand. “Volatility is likely to stay here and we have to work to accept this,” Zinglersen said.

Only about a dozen member states have their own strategic gas reserves.

By contrast, the EU already has strict rules on emergency oil stocks: each member state must hold crude oil with a consumption value of 61 days and continuously report inventory levels to Brussels.

However, initiatives to establish joint gas purchasing and storage in the EU are likely to be affected by technical difficulties and high costs. Natural gas is stored in underground tanks and the market is dominated by commercial players, including Russia’s Gazprom.

“Only a few member states can offer storage sites on a sufficient scale, which raises the delicate question of how costs are divided among them,” noted Christian Egenhofer and Irina Kustova at the Center for European Policy Studies.

Energy Commissioner Simson said on Wednesday that Brussels would propose a “voluntary” system for joint storage and procurement, encouraging countries to participate, but without creating mandatory rules.

Follow on Twitter: @mehreenkhn

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