Brussels The EU Commission wants to protect citizens and companies from high and strongly fluctuating electricity prices. To this end, she wants to introduce more long-term contracts in the electricity market and simplify state support.
This emerges from a preliminary version of a legislative proposal that the EU Commission will present on March 16th. The draft is available to the Handelsblatt.
The companies in the industry warn against excessively harsh interventions such as an obligation to hedge against price fluctuations. The industry fears that high electricity prices would be fixed as a result, warns Kristian Ruby, Secretary General of the Eurelectric business association. The industry has no interest in high prices, as this could slow down the electrification of many areas such as road traffic and heating buildings.
The discussion about changes in the design of the electricity market is already having a negative impact. At a recent hearing in the European Parliament, Ruby warned that the billions needed to invest in the energy transition would come primarily from American pension funds. These companies would reconsider whether to invest in the European market if the rules change too often – or whether they would rather rely on the grants from the US Inflation Reduction Act.
“Since the discussion about the electricity market design arose, we have been more careful with investment decisions,” confirmed Sjur Jensen, energy market expert at Vattenfall, to the Handelsblatt. “We’re looking at what can be deferred.”
Economics Veronika Grimm pointed out that it still takes time to implement the requirements from Brussels in the member states. “The longer the political process lasts, the longer investors wait,” she told Handelsblatt. “It is a great danger.”
Long-term contracts should be encouraged
The background is that some EU countries have been putting pressure on the EU for around a year and a half to reduce electricity prices by reforming the market design. With the draft law, the EU Commission is returning this idea to the member states: They are given new opportunities to support investments with state price guarantees.
The companies in the industry warn against excessively harsh interventions such as an obligation to hedge against price fluctuations.
(Photo: dpa)
This is made possible, among other things, by so-called contracts for difference (CfD), which should not only be open to investments in renewable energy, but also in nuclear power. Electricity producers and states agree on a fixed electricity price by means of contracts for difference.
If the producer achieves a lower price on the market, the state refunds him the difference. If he achieves a higher price, he must pay off the profit. If a high price is set, the state can provide an incentive for the construction of power plants.
In addition, long-term contracts, so-called Power Purchase Agreements (PPA), are to be promoted in the wholesale trade for electricity and the conditions for forward transactions are to be improved. In principle, having predictable prices is in the interest of the customer.
However, it could also have a negative impact on the electricity market. Because the more renewable energies are expanded, the more the supply of electricity fluctuates. If the price of electricity fluctuates at the same time, there is an incentive for electricity consumers to shift their demand to periods when electricity supply is high.
This is a core part of any consideration of how Europe’s power generation can be fully transitioned to zero-carbon technologies. But the more prices are fixed, the less this market mechanism works.
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“If we sell too much electricity via long-term contracts, we withdraw liquidity from the futures market,” says Vattenfall expert Jensen. “The liquidity of the futures market is necessary in order to offer consumers stability.” It is the declared will of the EU Commission to generate more flexibility among electricity consumers and to build up more storage capacity for electricity.
It is unclear whether the proposal will find a majority
The demands to skim off high profits or to pass on the low production costs from wind and solar to customers more quickly were not taken into account. Such calls have primarily come from Spain and France since electricity costs rose sharply in late 2021, only to spike sharply thereafter due to Russia’s attack on Ukraine.
Economics Veronika Grimm pointed out that it still takes time to implement the requirements from Brussels in the member states.
(Photo: IMAGO/Future Image)
Given this expectation, it is unclear whether the Commission’s proposal will find a majority among EU member states or whether they will find themselves mired in months of bickering, as has been the case on several occasions over the past year over energy issues. Time and again it was Germany that resisted government intervention in gas prices and the electricity market.
Finally, a special regulation for Spain and Portugal made it possible for electricity generation there to be subsidised. If such regulations were allowed across Europe, the states would have to protect themselves from the cheaper electricity flowing abroad. “If France and Spain were to prevail with their ideas of a massive expansion of the role of the state, this could lead to the collapse of the internal electricity market,” warned economist Grimm.
The paper does not contain far-reaching demands to intervene in pricing according to the merit order principle. Greece had requested this. The merit order describes the effect that expensive power plants only start up when they are really needed, but then set the price for the entire market. In practice, this means that the electricity produced cheaply with wind and sun is remunerated at certain times in the same way as electricity produced expensively with gas.
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Instead of shaking it up, the Commission is now trying in a different way to keep fluctuations in the market to a minimum. In the future, customers across Europe should be able to conclude long-term electricity contracts at fixed prices. This is already the case in Germany, but in many other countries customers pay a price that is strongly based on the fluctuating wholesale price.
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