How to lower European electricity prices?

by time news

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Because electricity has become unaffordable on the European market, the Twenty-Seven want to modify the functioning of this market. Why did it seize up and how can it be fixed?

This market was set up 25 years ago to set a price for electricity exchanges between countries linked by physical interconnections allowing them to secure their supply. This is then considerable progress: given that electricity cannot be stored, it is preferable to export its surplus or, on the contrary, to import it when the power stations are unable to meet demand, waste is avoided and power outages while smoothing the price.

It is clear that this market no longer meets the objectives set at the time of its creation, in this case low and stable prices. Yesterday, on the German electricity market, the reference market for all of Europe, the deliverable megawatt hour in 2023 exceeded the 1,000 euro mark, ten times more than the average of recent years. A totally aberrant level that no longer reflects the balance between supply and demand, but a panic fear of risk. A fear unleashed by the surge in gas, because the price of European electricity is correlated to that of gas.

Why this indexation on the price of gas?

It was necessary to find a common price between countries freely setting their energy policy and therefore their way of producing electricity. A price that is valid for both very expensive solar in its early stages, cheap but polluting coal-fired power stations or cheap hydroelectricity, because the investments have been amortized for a long time.

It was a challenge. The designers propose a system where the available plants are called in order of increasing cost and the last plant used to satisfy the demand, the most expensive, sets the market price. As in Europe, this so-called “most expensive” plant generally runs on gas, the electricity market is in fact coupled to that of gas. Since the price of gas has gone up, nothing is going well. The price of European electricity is skyrocketing, this is the opposite of the desired effect.

A market reform already requested by France

It is joined by the most reluctant countries, because today everyone is suffering: in Austria, the main producer Wien Energie has asked for state aid to cover its operations, idem for Uniper in Germany. These two countries, traditionally hostile to any reform of the market, have changed their minds in the last 48 hours. And the European Commission, hitherto very attached to the sustainability of this market as it stands, has also suddenly converted to the reform. Its content will be discussed next week in Prague, at the meeting of energy ministers urgently convened by the rotating presidency of the EU, currently exercised by the Czech Republic.

Czechs want gas price cap

The model is already successfully applied in Spain and Portugal. These two countries are less well connected to the rest of the continent to meet their electricity demand, which is why they obtained a derogation authorizing them, on an exceptional basis and for a limited period, to cap the price of gas to limit the increase in electricity price. When a gas-fired power plant is called upon to meet demand, the difference between the actual gas price and the capped tariff is retroceded to it. This special regime, in place since the end of June, has reduced the pressure: prices have fallen by 20%, Iberian electricity is three times cheaper than in the rest of Europe.

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