Brussels has called for “urgent” changes to the European electricity market

As electricity prices continue to rise in Europe, reaching levels unimaginable just a few months ago, the question is back on the table: is the interconnected energy market between Twenty and Seven exacerbating the ongoing crisis?

For the French government, which does not follow this system at all, there can be found the source of the fire, at least in France. And for good reason, its operation will create an artificial link between gas prices, which have exploded worldwide for more than a year, and electrons, including countries where current from hydrocarbons is not very from nuclear or hydraulics.

Faced with this observation, the European Commission itself, although at the beginning of the liberalization of this market, no longer seems convinced of its merits. ” The price increase […] clearly shows the limitations of [son] current operation “, argued on Monday its president, Ursula Von Der Leyen. Even the German Chancellor, Olaf Scholz (SPD), whose country relies on gas to produce electricity, pleaded in recent days for a sufficient system change, which ” cannot be described as functional if it leads to such high prices “.

Results: a emergency response “and one” structural reform of the electricity market is already on the agenda, with a meeting of energy ministers scheduled in Prague on September 9, we learned on Monday. But will changing the system make it possible to prevent the crisis?

Adjust the cost of the last plant called

Above all, you need to understand how this famous European market works. In concrete terms, its principle is the sale of marginal cost, ie the prices per megawatt hour (MWh) depend on the cost required to start the latest plant called to meet the needs of each Member State, especially in peak times. However, it is usually a fossil gas or coal-fired power plant, which is used as a last resort in Germany, for example, and whose activation depends on the cost of fuel.

“Imagine that I have three power plants, whose operating costs are each 10, 20 and 50 euros per MWh. If I need to call all three at once T, the final price will be aligned of 50 euros. That is, the first two will benefit from an infra-marginal rent, that is to say from a “profit”, essential.and the market price will be high », specified Jacques Percebois, director of the Center for Research in Energy Economics and Law (CREDEN).

Thus, all electricity prices in the EU will be indexed accordingly, regardless of their origin. In theory, all countries should more or less suffer the same increase regardless of their national mix (nuclear, hydraulic, gas, etc.), due to the rise in hydrocarbon prices, a paradox” deviating “, according to the French Minister of Economy, Bruno Le Maire.

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Public intervention to reduce marginal cost

Under these conditions, a method for improving the market has emerged, the implementation of which will reduce the effects of the crisis. In fact, it is the first it is possible to rely on the average marginal cost to set the price of electricity, rather than the hourly marginal cost of the final infrastructure put into operation. Returning to the example of three power stations, the equilibrium price of the market is therefore not 50 euros, but can be established by the average of the marginal cost of the three power stations called, i.e. a little less than 27 euros.

“The rent obtained in the first and second will decrease significantly, so together the consumer will pay less. And we have to imagine a form of payment for the third plant,” said Jacques Percebois.

Such a reform will however require a partial exit from the logic of liberalization promoted by Brussels since the 1990s, and the appointment of a regulator, which will set the price. But this idea was rejected by the Agency for the Cooperation of Energy Regulators (ACER), which helps ensure the proper functioning of the European gas and electricity market. ;The more interventionist the approach, the greater the potential for market distortion “, he defended at the end of April in an expected report. It can be inhibiting private sector investment” of new low-carbon technologies, which are necessary for the energy transition, he then argued.

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Lack of margins leads to decoupling

Especially since the rise in prices is not entirely due to the market. According to ACER, it is even the opposite: this interconnection system makes it possible to reap a profit of 34 billion euros per year on average, according to the organization, because it often prevents many countries from facing the destruction.

Above all, it is clear that despite this single market system, prices vary greatly from one Member State to another: while France and Austria recorded prices of 800 or 900 euros per MWh on Monday, those Germany, Belgium or the Netherlands tend to flirt around. 600 euros. And for good reason, the market is not “perfect”: if the crisis becomes more serious in some countries, the national price will move from the marginal cost defined at the European level, due to the congestion of the borders.

“When we establish the forecasts for the next day, we define the optimal exchange between countries, taking into account the interconnection capacities between the networks. If the exchanges remain below 12 GW, the price balance: the same can be seen on both sides of the border. But if we exceed them because we demand a lot of electricity from the neighbor due to the lack of production, a decoupling of the markets will happen”, explained a connoisseur of the sector .

In France, for example, nuclear production for 2022 is historically low due to a corrosion defect identified in the EDF fleet, which has led to an unprecedented explosion in prices within the borders. ” France should be a net exporter of electricity, but it is the opposite: it imports extensively, to an extent that the interconnections are saturated “, said Jacques Percebois. So it is for this reason, and not because of the architecture of the market, that the country faces much higher prices than elsewhere in Europe, including Germany, which is more dependent on gas to make it run .

“Let’s assume that we have enough nuclear units in France to satisfy all the demands of the citizens. Even if the electricity markets remain interconnected, the price of electricity in France will be much lower,” pointed out one former senior executive of EDF.

Invest in the means of production

In this respect, it is therefore not the interconnected market that is responsible for the observed surge, but a lack of physical infrastructure. In fact, the real mix will inevitably have an impact on the price of electricity, regardless of the structure of the market.

In other words, if the countries of the European Union do not have to rely permanently on gas or coal-fired power stations to produce their electricity, the problem of linking the price between hydrocarbons and electricity will not arise. However, even in the middle of summer (a time of low consumption), these fossil power plants are running at full speed. To get out of this vicious circle and mechanical lowering of prices, so there is no secret: it is necessary to invest in new means of production, even if it takes a few years to come out of the ground, or to reduce importance of energy demand.

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