Brussels
The EU sat out the problem for a long time, but now, after a long dispute, it is showing some movement. She wants to tackle the problem of high electricity prices. At their meeting, which lasted until Friday evening, the heads of state and government commissioned the EU Commission to draw up proposals for this.
This was preceded by an argument that lasted for hours, so that the summit meeting dragged on into the evening hours on its second day as well. Spain’s Prime Minister Pedro Sánchez is said to have left the negotiating room in anger. “Because the problems are big, the debates are appropriate,” confirmed Chancellor Olaf Scholz.
Interventions in the electricity market are now being examined, which Germany and other countries have so far clearly rejected because they fear distortions. Scholz fears that the price reduction could be “unsustainable”. There could even be problems with the supply, he indicated after the summit.
Spain, on the other hand, had made every effort to quickly change the rules on the electricity market. Spain, together with Portugal, France and others, have been trying to persuade the EU to make changes to the electricity market since September. At that time, the high gas prices had upset the population, especially because the price of electricity was also rising.
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Since then, prices have roughly tripled, and dissatisfaction has increased accordingly. In Spain, truck drivers are on strike, paralyzing supplies, while in France the government fears a new yellow vest movement, which would be inconvenient for President Emmanuel Macron just before the April 10 election.
Like many other EU countries, both countries have already significantly relieved consumers with national measures. But they want support.
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Sánchez even threatened to decouple himself from the European energy market together with Portugal. The two countries are poorly connected to the rest of Europe anyway in terms of power lines and gas pipelines. But these few connections are important in the energy crisis because other countries can be supplied with at least small parts of solar power and liquid gas.
Spain and Portugal want to introduce temporary price caps
After the summit, Sánchez, together with the Portuguese Prime Minister Antonio Costa, declared that they now want to quickly submit proposals for a price cap to the Commission. This recognized an “Iberian exception” and promised to examine the proposals urgently. Spain and Portugal only see a price cap as a formality, as reported in the Spanish media.
Measured against this, the outcome of the EU summit is remarkably conservative. There is a simple reason why the EU has been able to withstand the pressure for so long: so far, the proposals for intervention in the market have been very general. The governments demanded measures against the high electricity prices. These are to be decoupled from the gas price. But the EU Commission should explain exactly how this can work.
The Brussels authority has now given in and proposed three options for how the Europeans could proceed together.
- The operators of gas power plants could buy gas at subsidized prices. That would certainly lower the electricity price. But it could lead to distortions in cross-border electricity trading; it would lower incentives to reduce gas consumption and it would cost a lot of money.
- Wholesale electricity prices could be capped. That would lower the price and at the same time cut the currently very high profits of many growers. However, this would be an even deeper intervention in the market. In addition to the disadvantages mentioned, there would be even greater market distortions. The Commission also warns of a risk to security of supply.
- The profits of energy suppliers that do not work with gas could be skimmed off through special taxes. This would provide money for relief in other ways. This would be the least intervention in the market. But it does not lower the electricity price. And it would instead reduce incentives to invest in the expansion of renewable energy.
Germany has also been reluctant to date because increases in electricity prices only reach private customers with a delay due to long-term contracts. But the CDU is calling for movement: “The Commission’s proposals are going in the right direction,” says MEP Markus Pieper. “Renewable energy providers are making huge sums of money right now. Industry and household customers also have to pay for that.”
The longer such uncoordinated interventions last, the higher the risk that market participants will exploit the distortions. Just as motorists accept detours in order to refuel more cheaply in the neighboring country, electricity traders can also take advantage of discounts and price caps.
According to experts, market intervention must remain temporary
“It must always be clear that an intervention in prices is temporary,” says electricity market expert Georg Zachmann from the Bruegel Institute. “The incentives set by the market must be maintained.” At the same time, it is wrong to simply continue as before. “Conditions have changed,” he says. Not only has gas become more expensive, the massive expansion of renewables is also posing new challenges for the electricity markets. “That’s why it’s right to think about fundamental adjustments to market mechanisms.”
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Such adjustments are also currently being worked on. “In future we will need an electricity price that better reflects the mix,” says Pieper. This corresponds to the demand of many EU countries.
And Scholz was now also open to it, in the long term the topic would be on the agenda anyway. In the previous market design, the most expensive energy source sets the price. A price is thus found at which all required providers are adequately remunerated. As soon as nuclear, coal and renewable energies are not sufficient to meet demand, gas-fired power plants, which currently have high costs, have to be turned on.
This can happen several times a day and drives up the price. Operators of other power plants make high profits during these times.
Scholz explained the problem with the fictitious example of an electricity market in which there was only one gas power plant and many wind turbines. In such a case, too, the gas power plant would set the price. The problem is clear. “But the solution is not yet visible.”
One consideration is to assign a lower price to other energy sources. The states or the EU would have to determine this price.
EU works on reform of energy market law
Since October, Acer, the European agency for the cooperation of energy regulators, has been working out exactly how this can work. The previous market design is based on a law that was last revised in 2019 and works with thousands of pages full of detailed regulations. Price limits set by the state would be a major intervention in this set of rules, and the work involved is correspondingly complex.
The Acer report is expected at the end of April. At the end of May, the EU Commission intends to make a proposal on this basis. This would then have to go through the legislative process involving the EU Parliament and the Member States.
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