Energy experts: No easy solution to the electricity market reform

Created: 09/01/2022Updated: 09/01/2022 10:16 p.m

The seat of the EU Commission in Brussels.

© Zhang Cheng/XinHua/dpa

In view of the high energy prices, politicians are promising a far-reaching reform of the electricity market to relieve consumers.

However, experts warn against hasty market interventions.

There are already suggestions for a solution.

According to energy experts, there is no easy solution for the reform of the European electricity market.

"Politicians hope that the stroke of a pen can ensure that prices become cheaper," said economist Georg Zachmann from the Brussels think tank Bruegel of the German Press Agency.

"The difficulty, however, is that many have tried to do this and there are no good suggestions."

In view of the high prices, EU Commission President Ursula von der Leyen has announced a structural reform of the European electricity market and emergency measures in the coming weeks to relieve consumers.

From the expert's point of view, there are doubts as to whether this will work out quickly.

Electricity from gas-fired power plants drives up the price

On the European electricity market, prices are currently set primarily by gas-fired power plants.

Since the price of gas has risen sharply against the background of the war in Ukraine, electricity has also become more expensive.

This is because the price of electricity is determined by the most expensive switched-on power plant required for production.

When demand is low, cheap electricity from wind power, for example, is sufficient.

Currently, however, expensive gas-fired power plants have to be used to meet demand - and the price depends on them.

Goal of the reform and the doubts about it

A reform is intended to decouple prices so that consumers pay less for cheap electricity from the sun and wind, for example.

According to Zachmann, even in an alternative system, the price would level out at the price of the most expensive energy source.

"It's an economic law." According to the expert, this is due to the fact that even suppliers of cheap electricity - such as from wind power - can demand a higher price when demand increases and more expensive energy sources - i.e. gas power plants - have to be switched on.

"I think you can only permanently suspend the merit-order price mechanism if you radically centralize the market," said Zachmann.

Decoupling is only possible if the state can intervene in virtually all contractual relationships.

From the expert's point of view, such a reform would be lengthy and politically unrealistic, also because of the different interests of the countries and energy companies.

Energy economist Claudia Kemfert takes a similar view.

"Decoupling the gas price from the electricity price by adjusting the merit order is neither feasible nor sensible in the short term," she told the "Rhein-Neckar-Zeitung".

A reform of the electricity market must be agreed across Europe.

"Short-term quick fixes are not advisable." Politicians also warn: "An electricity market reform in the middle of the energy crisis is not a sure-fire success," said MEP Markus Ferber (CSU).

Gas price cap

Spain and Portugal have capped the price of gas used in electricity production to make electricity cheaper too.

On the Iberian peninsula, there is only a special regulation because it is only partially connected to the rest of Europe.

Countries like Belgium and Italy are also demanding a price cap at European level.

In a draft with initial proposals, however, the EU Commission is against an EU-wide price cap based on the Iberian model, as this would lead to higher gas consumption.

Zachmann also points out: "This has massive side effects and will then trigger a correspondingly high level of resistance in some member states." In the end, it could mean that not enough electricity is available in some places because, for example, providers are at a certain point in time do not want to deliver at a certain price.

In Spain, it is also observed that cheaply produced electricity is exported to France, where prices are higher.

excess profit tax

According to Zachmann, one possibility is an excess profit tax for companies that earn exceptionally through high electricity prices - such as operators of nuclear power plants or wind turbines.

"So that you tax the excessive profits of the electricity companies in some way and then pay this money back to the customers."

In its draft, the EU Commission proposes a similar measure, but does not name it an excess profit tax.

Profits from companies that produce cheap electricity are to be redistributed above a certain price limit.

"We have to say with the low-cost energies, you can make a certain profit, but not everything far beyond what you dream of can stay with you," von der Leyen said in Berlin at the beginning of the week.

Part of the profits must be used to support companies and people with low incomes.

"A European energy money would be the right start to be able to help quickly," said Green MEP Michael Bloss.

However, Zachmann warned that determining the excess profits is complicated - also because electricity that was sold last year is only now being produced.

Such a tax is already being implemented in Italy, but some companies are refusing to pay it and are suing.

supply and demand

According to Zachmann, the basic problem is the lack of energy.

He advocated connecting as many additional power plants as possible to the grid so that more energy is available and at the same time providing more incentives to save energy.

"If we can better reconcile supply and demand, then many of these price problems will also be solved from the usual mechanism." The EU Commission also proposes electricity-saving measures in the draft - similar to the gas-saving targets that have already been decided.

How it goes on

The topic is to be discussed at a special meeting of EU energy ministers on September 9, at which the first proposals by the EU Commission are expected to be discussed.

Von der Leyen may suggest something more specific in her Sept. 14 State of the Union address.

It is also still unclear whether the measures will be voluntary or mandatory.

At the beginning of next year, the Commission also intends to present a proposal for a more far-reaching, structural reform.

This then has to be negotiated by the EU states and the European Parliament - this usually takes several months.

So it could be a while before consumers feel anything about an EU reform.

dpa