The European electricity market: this radical reform that will change everything

European Commission President Ursula von der Leyen told MEPs on June 8 that a radical reform of the electricity market is needed. For him, “The electricity market is no longer functioning and needs radical reform to meet all the challenges caused by the structural changes associated with the low-carbon transition. […]. It must be adapted to the new reality of dominant renewable energies (RE) because the electricity market was designed twenty years ago when renewable energy was scarce.

Faced with the crisis of electricity prices linked to the gas market, Emmanuel Macron spoke on June 28 for a completely different reason in favor of an overhaul of the European electricity market, evoking the a fix. “worthless” in its prices in a country with mostly nuclear and hydraulic fleets, not to mention the extreme price peak at the end of August of 1,100 euros per MWh in futures prices for 2023, due to speculators betting on weakness in its nuclear production. date

The meaning of that market reform remains to be clarified due to the various challenges associated with the transition of the electricity system, namely:

  • the protection of consumers, households and manufacturers, against the risk of a long-term price crisis which is a priority in France, but not so much in Berlin and Brussels;
  • the effective development of low-carbon, intermittent renewable energy (ENRi), wind and solar photovoltaic, but also nuclear technologies around the ten Member States;
  • the maintenance of security of supply which has been undermined by the closure of many controllable means of production.

Deficiencies in market design for the low carbon transition

Due to its specificities, especially its non-storage, electricity is a very special good, whose markets must be structured every hour. Through the competitive game, producers are led to align their hourly price offers with the cost of fuel for each piece of equipment to give themselves the best chance of being selected. In this scheme, the average annual prices have no reason to be consistent with the average of the total costs of the means of production, unlike tariffs in the context of monopolies.

In addition, high price volatility makes long-term forecasts impossible for a potential investor in particular capital-intensive low-carbon equipment with long life cycles (some decades) such as nuclear power, offshore wind power or hydropower. In addition, ENRi requires for security of supply and stability of the system, the development of methods of flexibility (network, storage, interconnections, electrolyzers, gas turbines), as many equipment with high which is a fixed cost while the investor does not. there is no certainty of stable and visible revenue streams in the various markets involved in electrical energy.

Keep previous market design changes

To meet the challenges of security of energy supply and transition, the architecture of the market has been modified by adding various patches. For security of supply, mechanisms for payment capacity (and not energy) were put in place in the 2010s in various European countries. Others based on long-term contracts, such as the United Kingdom, Italy and a part of France, have proven to be the most effective in encouraging producers to invest. It is expected that the scope of these contract-based schemes will be expanded to other sources soon.

To ensure the development of ENRi, which is highly competitive today, most countries have implemented contracts that guarantee them long-term income. Since 2017, they have been inspired by those implemented since 2013 in the United Kingdom, which are financial contracts of the State type, the “contracts for difference” (CfD), which are awarded at auction. They are expected to nuclear projects, but in a negotiated way.

In these contracts, a reference price is set, which must cover the fixed costs of the ENRi producer. Committed to such a contract, the latter collects or pays the difference between the hourly market price and this reference price, depending on whether the first is higher or lower than the second. This is the principle of additional charge contracts (CCR) that succeeded in the EU in the purchase tariffs for large installations of renewable energy.

The solution to be used to speed up the transition is to multiply these contracts awarded through the auction of ENR developers by speeding up their frequency. The spot market is maintained to maintain the hourly balance of the systems and to organize exchanges between countries, while responding to the needs of investors for a long-term price signal that allows the trigger in low carbon investments and sources of flexibility (including connecting the gas sector for the production of green hydrogen).

This is the direction of the reflections currently being carried out in Germany within the framework of the platform “Towards a neutral electricity system for the climate” established by the Ministry of the Economy (see the example of the proposal of the Agora-Energiewende 2022 ) . But there is no recognition of the need for capacity mechanisms, to which Germany seems to remain hostile, or of the interest of guaranteeing a certain stability in selling price offers, while every hour that The price of electricity will always depend on the price of fossil fuels. gas and CO2 because periods of moderate wind are prevalent (this is what we observed throughout the summer).

The purpose of consumer protection

France has the same objectives of recomposing the “market design”, but with the concern of finding a solution to ensure stable and moderate prices for consumers, reflecting the growing supply through inexpensive renewable energy sources and through nuclear power, without these latter must lead to the consequences of periods of high gas prices.

The market architecture solution must be simple, consistent and lead to a method of determining the final sales prices that are consistent with the long-term costs of all equipment, and not only renewable energy, while sending a long-term price signals to all producers that encourage them to invest.

We have developed such a model of the electricity market detailed in an article in the Energy Review (June 2022, n ° 662), which we call the central model of the long-term buyer. This public entity will be in charge of concluding CfD contracts with all producers (ENR, nuclear, fossil fuels), grouping them and selling almost all wholesale electricity to suppliers and large consumers at prices consistent with long-term cost. end of all techniques. It consists of adding to the current “market design” a brick made up of a long-term market organized in the center by a public intermediary.

The central long-term buyer, a unified solution

The independent public entity to be installed must perform several functions:

  • the sharing of investment and market risks with producers through CfD-type contracts entered into for each piece of equipment (and possibly through physical contracts);
  • the organization of the long-term market for the awarding of contracts through auctions to maintain competitive pressure, and this through the type of technology;
  • the purchase in the short-term market of most of the physical electricity corresponding to the financial contracts signed by the producers, it is known that the hourly markets always ensure the short-term coordination and integration of economy of other systems. For a producer, by combining the income from spot sales and from the contract for difference (CfD) with the Agency, the new producer has a guaranteed income stream that enables him to invest in the long term. ;
  • the sale of all the electricity it obtains to suppliers at sales prices consistent with long-term costs, the method of definition to be set by the regulator. The suppliers, who are therefore given equal and transparent bases, compete based on their prices and service offers, which contributes to the flexibility of the system.

The adoption of this model in France will restore true economic and institutional cohesion in the electricity sector.

This new market model will respond equally to the three major objectives of facilitating the energy transition, security of supply and consumer protection. It will be legitimate for it to be an option of choice open to Member States, especially those who want to pursue a transition strategy open to all low-carbon technologies, nuclear and renewable energy, especially because it is not against the essence of The rules of Europe, short-term exchanges with different systems that continue to operate on a competitive basis between highly integrated spot markets.

What about France?

The adoption of this model in France will restore true economic and institutional cohesion in the electricity sector. This reform will answer both of the criticisms directed at the incomprehensible mechanism for setting electricity prices and the need clearly confirmed by the Prime Minister on July 6 in front of the representatives, for France that able to exercise its sovereignty in terms of energy choices. , which it did first by renationalizing EDF.

This adoption will also solve the issue of changing the Regulated Access to Historic Nuclear Electricity (ARENH) system in 2025 because fair competition will be established between all suppliers and EDF Commerce in the retail market. In addition, since this competition is based on final prices consistent with the long-term cost of the electricity mix, there is no need to use regulated sales tariffs (TRV) for residential and tertiary customers, contrary to the spirit of Article 5 of the Electricity Directive which prohibits any price regulation, except for social reasons.

An independent public agency with commercial status will be created, with functions inspired by those of the British establishment LCCC (Low Carbon Contracts Company) that integrates all the CfD contracts signed by the renewable energy and nuclear producers across the Channel. Renationalization will not solve the current difficulties if it is not accompanied by an overhaul of the electricity market and competition rules at the European level as proposed here, a condition recently underlined by a financier from Standard & Poor’s for the restoration of EDF’s renationalized credit. rating.

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