There is no power price crisis in Europe – analysis

In light of calls for the merit order at the electricity market to be reformed, Eurelectric has commissioned a report, which showed that Europe is not experiencing another power price crisis. Marginal pricing is the standard for commodities, so an intervention would make the design more complex, according to the paper. The conclusion is that such a move could increase costs for consumers, while undermining investor confidence.

The situation in wholesale electricity markets in Europe is “absolutely not comparable” with the 2022 energy crisis, Founder and Director of Neon Neue Energieökonomik Lion Hirth wrote. In the paper that Eurelectric commissioned from his consulting firm ahead of the two-day European Council meeting scheduled for March 19, he argued that any manipulation of prices would, at best, create inefficiency and drive up system costs. “At worst, it would create chaos and jeopardize security of supply,” the author stressed.

After a controversial decree in Italy and calls from other countries to split the markets into a renewables segment and one for fossil power plants, EU leaders are set to discuss the way forward for market design.

Power prices mostly range between EUR 50 per MWh and EUR 90 per MWh

“The impression that electricity prices have returned to crisis levels is false. At the peak of the energy crisis in 2022, forward electricity prices reached EUR 1,000 per MWh. Today, they range between EUR 50 per MWh and EUR 90 per MWh in most member states,” said Hirth, who is also a professor of energy policy at Hertie School in Berlin.

He attributed higher power prices in some parts of Europe and other regions to higher natural gas prices and emissions pricing.

Revenues are not windfall profits

Marginal pricing is the standard mechanism through which prices form in competitive markets — not only in electricity, but also in commodities such as oil, gas and metals, the analytical memorandum reads. The so-called merit order curve is just another name for the short-term supply curve, Hirth explained.

“Prices in commodity markets reflect the marginal cost of the last unit needed to meet demand. Electricity markets function in the same way. Revenues earned by generators with lower variable costs are not windfall profits; they are necessary to recover investment costs and fixed costs,” the author underscored.

Lowered power prices would imply more state aid for beneficiaries of support schemes

Proposals such as gas subsidy schemes or splitting electricity markets between renewables and fossil generation would either lead to a more complex system or ultimately increase costs for consumers, while undermining investor confidence, he stressed.

“The subsidy paid to gas plants is recovered through a new levy, increasing final electricity prices. What is more, support payments to renewable generators are often structured to adjust automatically when wholesale prices decline. As a result, lower market prices increase subsidy payments, which are ultimately financed by taxpayers or electricity consumers,” the expert added.

He pointed to a range of sensible options to lower electricity prices for consumers, from targeted support for vulnerable consumers to structural reform.