Energy Crisis

EU governments preparing market reforms to decouple power prices from gas

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Photo: Gerd Altmann from Pixabay

Published

August 29, 2022

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Published:

August 29, 2022

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Record-breaking power prices, and the threat they pose to households and businesses throughout Europe, have prompted some EU governments to call for a market intervention. Austria, Belgium, and Germany believe market reforms are inevitable in order to weaken the prevailing influence of natural gas costs on electricity prices.

The first concrete steps could be agreed on September 9, at an emergency meeting of EU energy ministers convened by the Czech Republic, which currently holds the bloc’s rotating presidency.

Even though both gas and electricity prices have been hitting new highs every day, the power prices are the bigger problem at the moment. Year-ahead prices in Germany have already climbed to EUR 1,000 per MWh.

Sikela: the best solution is an EU-wide solution

The Czech Republic, as reported by Euronews, will propose capping the price of gas used in electricity generation, but other options should be discussed in the meeting as well.

Czech Industry Minister Jozef Sikela said the price of electricity should be separated from the price of gas by decoupling the two markets. He said this is a pan-European problem, which affects all countries, to various extents, and that the best solution would be a Europe-wide solution.

Germany is preparing power market reform

Almost simultaneously with the announcement of the emergency meeting of EU energy ministers, Germany announced it was considering decoupling the gas and electricity markets to tame rising power prices.

The German Economy and Climate Action Ministry has confirmed for Euractiv that it is working on a reform that would prevent rising gas prices from affecting electricity prices for end-consumers.

The aim is for consumers to benefit from cheap renewable energy

The aim, according to the ministry, is for consumers to benefit from electricity that can be cheaply produced from renewable energy sources, while the costs of the measures would be financed from windfall taxes levied on energy companies profiting from rising prices.

Demands for market reforms in the EU could already be heard several months ago, voiced by France, Italy, Portugal, and Spain. Greece has even prepared a proposal to create two separate markets – one for electricity produced from expensive fossil fuels and the other for cheaper electricity from renewable sources.

Portugal and Spain have already limited the impact of gas-fired power plants on electricity prices

An EU-wide agreement was not reached, but Portugal and Spain were given the green light to introduce a mechanism to subsidize the price of gas for gas-fired power plants, bringing down wholesale electricity prices. The prices in these two countries have indeed gone down since the mechanism was introduced, but some unwanted side effects have also been recorded, such as the doubling of gas consumption in gas-fired power plants.

The Iberian mechanism and the German government’s announcement are focused on gas power plants as they dictate electricity prices due to the highest cost of generation – and the market is designed in such a way that the price is dictated by power plants with the highest generation costs that are necessary to meet the demand.

Austria and Belgium are also calling for action

Germany apparently enjoys Belgium’s backing, with Belgian Energy Minister Tinne Van der Straeten noting that electricity generation costs today are much lower than the prices at which gas and electricity are sold. She said that there is no connection anymore between production costs and sale prices, adding that the EU’s power pricing mechanism should be revised. Her views have been backed by Belgian Prime Minister Alexander De Croo.

A similar sentiment is shared by the Austrian government, which has also stated that the electricity price hikes are due to record gas prices.

Prices must get closer to actual costs of electricity generation

Austrian Chancellor Karl Nehammer has said that “this madness” on electricity markets must be stopped, and he also called for an EU-wide solution.

The Austrian government wants to decouple electricity prices from gas prices to make sure the price of electricity is closer to the actual costs of generation, he said, noting that nuclear power plants and renewable energy installations produce a large share of the electricity consumed in the EU’s at minimal cost.

The European Commission was initially against a market reform, but the EU executive’s president, Ursula von der Leyen, later said that the bloc’s electricity market was no longer fit for purpose. On the other hand, a number of experts are not in favor of changing market rules, reflecting the position of Eurelectric, the European industry association for the electricity sector.

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