The electricity market is increasingly caught in the storm of rising energy prices. Volatile (fluctuating) electricity, plannable electricity and controllable electricity are traded here.
Nevertheless, each kilowatt hour of electricity ultimately has one and the same price, which is determined by the total supply and demand at the respective point in time. The uniform pricing within the so-called merit order system causes the price of all generation types to be based on the last needed and therefore most expensive kilowatt hour. In recent months, that last kilowatt hour has mostly come from gas.
This means that wind, solar, nuclear and lignite power are also remunerated with the electricity price on the basis of natural gas, regardless of their generation costs. Gas currently accounts for around 13 percent of electricity generation; however, the gas electricity price is applied to 100 percent of the electricity.
Attempts to counteract the price-setting effect simply by massively increasing the volume of electricity have failed. Because electricity is not just electricity. Electricity from gas-fired power plants cannot be replaced everywhere by electricity generated elsewhere.
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Electricity from gas-fired power plants is always needed when, due to fluctuations in wind and sun or due to power plant failures, as is currently the case with French nuclear power plants, additional generation is required at short notice – and therefore controllable.
With the Replacement Power Plant Provision Act, the traffic light coalition has recently installed levers to largely keep gas out of electricity generation by using coal-fired power plants and oil instead of gas.
Electricity from gas-fired power plants cannot be replaced everywhere by electricity generated elsewhere.
We can save electricity and we can temporarily suspend industrial production and shift loads. However, the end point is reached when a minimum supply is no longer guaranteed or production becomes uneconomical and permanently migrates. This point has now been reached through pricing according to the merit order system in combination with reduced Russian gas imports.
The market rules mentioned threaten security of supply and come into conflict with the state’s mandate to provide services of general interest. Irrespective of further relief measures and energy saving incentives that are urgently needed, the state must intervene when market mechanisms become independent, when households with small and medium incomes and pensioners in general can no longer pay their bills even with economical energy consumption and there are also fears of job losses. In addition, the current market design offers Russia, for example, a field of action for destructive market manipulation.
Yes, as announced by Federal Economics Minister Robert Habeck, we need a reform of the electricity market. They must tailor the electricity market to the necessary growing share of renewable energies, their fluctuations, the need for storage and the corresponding grid management.
>> Read here: Industry warns of massive damage from short-term gas shutdowns
Nevertheless, a comprehensive reform would come too late in response to acutely exploding electricity prices. Lower Saxony’s Prime Minister Stephan Weil put it in a nutshell: the state must now intervene quickly and consistently in the price structure. The rules of the electricity exchange do not match the current situation.
From a political point of view, at least temporary state electricity price regulation follows, whereby the following premises apply: The effect of the natural gas price on the electricity price must be limited or suspended quickly. The costs of the intervention must be kept as low as possible.
It is now a matter of setting all levers in motion. The following five approaches should be discussed:
1. Introduction of a market price cap
The electricity exchange works as before, but the price that is actually effective will be capped. Power plants receive and consumers only pay this price. Power plants that have higher costs, especially gas-fired power plants, are entitled to compensation for the additional costs. In Spain and Portugal, where the model has been used since May, the electricity market prices are a quarter of the German daily prices. If you add the necessary compensation for the gas power plant costs, it is still less than half of the current German prices.
2. Reducing the marginal cost of generating electricity from gas
Allocation of government-purchased gas volumes at a set price. A change in the market mechanism would not be necessary here. With the help of quantity specifications, it would have to be ensured that this would not create an incentive to increase gas consumption.
3. Gas power generation takes place temporarily on behalf of the state
The operation and use of the gas power plants is carried out on behalf of the state. The amount of electricity generated can thus be fed in from a neutral point as required at the operating costs.
4. Creation of a separate market for electricity from flexible generation
A separate market will be introduced for power plants that can be controlled as required, with a specified number of full-load hours. The higher costs, especially for gas-fired power plants, no longer affect the price on the main market. Free-rider effects for other types of generation are avoided.
5. Remove gas-fired power plants from joint pricing
As under 4., a separate market will be created, but exclusively for gas-fired power plants, which will be removed from the common price setting with the help of a separate marketplace. Already booked delivery quantities remain. Quantities in excess of this from gas-fired power plants are no longer permitted on the regular electricity market.
It is now important to find a suitable approach as quickly as possible that also avoids undesirable effects. The European network and the European internal electricity market must also be taken into account.
Accordingly, an approach should preferably be chosen that can also be transferred to the EU level or at least combined with it. However, in order not to have to wait for the necessary joint processes, national measures should not be delayed, ideally in coordination and cooperation with direct neighbors and electricity trading partners.
The author:
Nina Scheer is energy policy spokeswoman for the SPD parliamentary group.
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