Brussels The EU Commission is pushing ahead with its intervention in the electricity market at great speed. Less than two weeks ago, EU Commission President Ursula von der Leyen mentioned for the first time that she was considering an emergency measure in view of the high electricity prices. The EU energy ministers will discuss this on Friday. A proposal ready for a vote should already be available on Tuesday.
But market experts and representatives from the electricity industry are at a loss when faced with the papers that the Commission has since distributed to the member states. Lion Hirth, professor of energy policy at the Hertie School in Berlin, said: “The Commission may have simply overlooked a massive problem.”
The problem lies in the fact that the sales are to be calculated using the spot market prices and then skimmed off. In Germany, however, by far the largest share of electricity is not traded on the spot market, but via long-term contracts and futures contracts. In 2021, the trading volume on the futures markets was about eight times higher than on the spot market.
On the futures markets, producers usually sell their electricity one to three years in advance. This gives you and your customers – industrial consumers, but also municipal utilities – planning security.
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A moderate price was therefore agreed for the electricity that these customers are now being supplied with even before Russia invaded Ukraine. According to the plans known so far, however, these amounts of electricity would be treated as if they were subject to today’s high spot market prices. Instead of discharging excessive chance profits, power producers and traders would have to pay large sums that they never earned.
The five points presented by der Leyen to mitigate the energy crisis are not enough for some states.
(Photo: AP)
The German Renewable Energies Association (BEE) has been pointing out such problems with market intervention since spring. “Depending on the design of the EU plans, the producers who supply cheap electricity at an agreed fixed price would be penalized,” said Simone Peter, head of the association, to the Handelsblatt.
>> Read here: Price limit on the electricity market could be set at 200 euros per megawatt hour
Peter believes it is right that the EU is tackling the problem together in order to avoid distortions in the internal market. “However, when designing the measures, the utmost accuracy is required,” she said. There is currently a lack of that, say observers like the electricity market expert Hirth.
How to solve the problem? An obvious possibility would be to only intervene in stock exchange trading, where the high price swings can be observed. But then trading would collapse there, predicts Hirth: “If only the sales on the electricity exchange are used, trading will be relocated immediately,” he says. “Then there simply won’t be any more electricity exchanges.”
The European Energy Exchange is an energy exchange for energy and energy-related products.
(Photo: IMAGO/Dirk Sattler)
The EU Commission does not want to comment on the problem so far. The next step is to listen to member states, a spokesman said.
Hope lies with the federal government
The hope also lies with the German federal government, since futures transactions are particularly important in Germany. The Ministry of Economic Affairs will take up the issue. “We are currently working on solutions that take into account the different sales prices outside of the spot market,” said a spokeswoman. She assured: “Unreasonably high levies, which lead to insolvency risks, are of course avoided.”
How exactly this is supposed to work is still unclear. The EU regulation would have to include the long-term electricity transactions and first of all bring transparency to the market with many small providers and electricity traders.
>> Read here: How the system of random profits and electricity price brake could work
These have a large number of contracts with one another that have not been recorded and evaluated centrally up to now. “Nobody knows these long-term electricity contracts. How they can be calculated is still completely unclear,” says Hirth. “The law still needs to be significantly amended. It’s about more than a few sentences.”
Discussion about gas price cap
The Commission still has a number of other problems to solve. Von der Leyen wants to propose five measures to mitigate the energy crisis to the energy ministers. In addition to skimming off electricity market profits, the aim is also to make savings, a solidarity contribution from oil and coal companies, liquidity support for threatened energy traders and a cap on the price of Russian gas.
The price of European natural gas fell to its lowest level in about a month on Thursday ahead of the meeting of EU energy ministers.
(Photo: IMAGO/CHROMORANGE)
But this five-point plan is not enough for some states. Poland’s Prime Minister Mateusz Morawiecki wants electricity prices to be reduced directly through market intervention, instead of siphoning off sales that then have to be redistributed afterwards. Redistribution could pose problems for many countries.
However, experts from the EU Commission warn against proposals like Morawiecki’s, because they could completely mess up the energy markets and cause serious shortages. And the problem of not covering long-term contracts would be the same as with the interventions proposed by the Commission.
The EU Commission also wants to take a look at gas. The price of European natural gas fell on Thursday to its lowest price in about a month – and thus by eight percent. The price of the futures contract for Dutch natural gas was therefore EUR 197 per megawatt hour. The TTF contract is often used as a guide to European price levels. Nevertheless, the topic of gas is pressing ahead.
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Czech Industry Minister Jozef Sikela has spoken out against the plan to cap the price of imports of Russian gas. This is more of another sanction against Russia than a contribution to solving the energy crisis in Europe, he said. Sikela will chair the ministerial meeting this Friday as the representative of the EU Council Presidency.
Belgium’s Prime Minister Alexander De Croo, on the other hand, wants to extend this gas price cap and not only affect Russian gas, but also liquid gas imports.
Electricity and gas shortage warning
Meanwhile, many trade associations are pushing for energy prices to be brought down somehow. Others fear possible supply bottlenecks even more than high prices.
Peter Adrian, President of the Association of German Chambers of Industry and Commerce (DIHK), told Handelsblatt: “It is important to mobilize all generation and network capacities in order to counteract the energy shortage.” Adrian warned: “However, a price cap on imported gas would be the wrong thing to do Medium, because he would further reduce the supply.”
The European association of the metal industry Eurometaux calls for a temporary solution to lower electricity prices. “But we are also concerned that there could be further gas shortages in the winter if Europe’s response leads to higher consumption,” said Adina Georgescu, director of energy and climate at Eurometaux.
More: “Limiting Putin’s revenue” – That’s von der Leyen’s five-point plan for the gas crisis