But economists warn urgently against intervening in price formation on the electricity market. A price cap could make the problem worse, they say.
“To unhinge a price mechanism because of a few days with high prices is a hasty decision,” says Sebastian Herold, energy economist at Darmstadt University of Applied Sciences. “An intervention can lead to strange effects,” warns electricity market analyst Fabian Ronningen from the consulting firm Rystad. “There are too many moving parts that are difficult to control.”
One of the greatest dangers lies in foreign trade. If Germany makes its electricity cheaper, it could flow into neighboring markets and with it the subsidies that the state has invested. The problem will remain even if the EU countries agree on a price cap. In this case, cheaper electricity can flow to non-EU countries, such as Great Britain.
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The effect can currently be observed in Spain. Together with Portugal, the country has decided on subsidies for the electricity market. Since June, states have been paying part of the gas used to produce electricity. There is also talk of a gas price cap. The two countries have thus brought the electricity markets closer to their old balance, and prices have fallen noticeably.
With a price cap, an outflow of electricity could hardly be prevented
But since then, significantly more electricity has flowed from Spain to France. The Spanish taxpayers also subsidize consumption in the neighboring country. The effect is limited because the power grid on the Iberian Peninsula is poorly connected to the grid in France. In addition, the capacity of the interconnector was further reduced with the introduction of the subsidy.
>> Read here: Model Spain: Scholz is looking for help in the energy crisis
With a price cap in Germany or the whole of Europe, the drain would hardly be able to be stopped. The power grids in Western Europe are closely interconnected, including with the UK. The links ensure that electricity is exchanged as efficiently as possible, which ultimately benefits all market participants and increases the liquidity of the electricity markets and security of supply. Capping them would further exacerbate the problems.
Consumption only falls when electricity is expensive. Sebastian Herold, energy economist from Darmstadt University of Applied Sciences
In addition, the electricity markets follow the same rules as the EU-wide rules. But market participants behave differently. In Spain, a lot of electricity is traded on the spot market at short notice. In Germany and other countries, companies stock up on long-term electricity on futures markets. “The Spanish intervention is aimed entirely at the spot market,” says energy economist Lion Hirth from the Hertie School in Berlin. “Some producers would benefit from the subsidies even though they have long since agreed a price with their customers. That’s how profits keep growing.”
Sebastian Herold, energy economist from Darmstadt University of Applied Sciences, is also concerned about the price signal: “Consumption only falls when electricity is expensive,” he says. “It is an illusion that the state can achieve the same effect through coercive measures.” In addition, investments in new wind and solar systems would be jeopardized: “We need a lot, but no state that introduces uncertainties into the market through interventions”, says Herald.
But what is the alternative? The economists advocate accepting price jumps. “The market works and we need it, right now,” says Hirth. “We should support those who are particularly affected, but not by manipulating wholesale prices.” If companies can then no longer make a profit, they would have to withdraw from the market temporarily. Then the prices for other consumers would fall again. Households and systemically important companies would be better supported with direct payments.
Economists at odds over excess profits tax
Hirth advocates skimming off one-time profits from companies that earn a lot in the crisis. Herald is against it. “Emotionally, I find the demand understandable,” he says. “But excess profit is difficult to define, and for companies, high profit is a key incentive to invest in new assets.”
>> Read here: Why the excess profit tax can hardly keep what politicians promise
The market can have a calming effect if the electricity supply is expanded. There aren’t many ways to do this, other than using coal-fired power plants from the reserve. Taking the German nuclear power plants off the grid as planned at the turn of the year would, according to many experts, further aggravate the situation. It is still unclear exactly which measures the EU Commission will propose. Commission President Ursula von der Leyen sees them only as a “preliminary step” for “profound structural reforms”.
The starting point for this is the “merit order”, i.e. the principle that electricity from different sources is paid for at the same price and that the most expensive electricity source sets the price. Southern European governments had already called for this a year ago, but the debate was ended by an expert report: In April, Acer, the association of European energy regulators, presented a 78-page analysis of the market design. All measures that override this principle, “pose significant risks,” it says.
The Acer report contains a number of improvement measures for the electricity market, which should have the effect, for example, that the electricity demand can be adapted to the supply to the minute. Changes to the merit order principle are not recommended.
Von der Leyen now wants to try it anyway: “The gas price must not dominate the electricity price,” she said on Monday in Berlin at an event with Federal Minister of Economics Robert Habeck (Greens). He too is determined: “The fact that it’s complicated doesn’t mean that it can’t be tackled,” he said. “The fact that tasks are complex is no longer an excuse.”
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