The race is on to reform the EU’s power market

The race is on to reform the EU’s power market
Опубликовано: Tuesday, 14 March 2023 06:34

Despite opting for a more slimmed-down proposal, the EU will need to go fast to finalize a deal before next year’s European election.

The European Commission is about to present a “targeted” reform of the bloc’s power market — even if the mad political drive to rejig how electricity is priced during last year’s emergency has subsided.

That means the proposals being put forward by the Commission on Tuesday are more limited — not the revolution advocated by some countries like France and Spain, but also more than market conservatives like Germany and the Netherlands wanted — according to drafts seen by POLITICO.

But even as the pressure to overhaul the market has faded, it’s been replaced by a fresh effort to build enough political traction to get the proposal through the EU’s legislative process before next year’s European election.

“Last year, politicians essentially wanted to take over electricity market designs and thought they knew what outcomes they wanted — they wanted to repair the market with a hammer,” said Georg Zachmann, senior fellow at the Bruegel think tank. “At the same time, the pressure in European energy markets has somewhat relaxed and the result is we have a much more targeted reform.”

In the latest draft proposal obtained by POLITICO, the EU executive focuses on helping consumers by asking that they receive clearer information on energy markets, have greater choice in their utility bills and get protection from electricity disconnections.

Similarly for businesses, it seeks to lower barriers for smaller companies looking to access stable, long-term contracts called power purchase agreements, potentially through state guarantees.

That’s weak beer compared with the demands being bandied about last year — when natural gas prices were more than 10 times their normal levels thanks in part to the impact of Russia’s invasion of Ukraine.

Gas prices in turn drove electricity prices through the roof thanks to the way the EU’s wholesale power market is designed. Under a system called merit order, the price is set by the last and most expensive input needed to meet demand — recently natural gas.

That caused prices to soar even in countries where gas is a marginal source of electricity — like Spain, which relies heavily on renewables and France, which gets much of its electricity from nuclear.

Under enormous political pressure, Commission President Ursula von der Leyen pledged in September a “deep and comprehensive reform of the electricity market” that she said was “no longer fit for purpose.”

“The current electricity market design — based on merit order — is not doing justice to consumers anymore,” she added.

Pressure relief

But with wholesale gas prices falling more than sevenfold from the record highs seen last August and the EU election on the horizon, the Commission has steered away from a radical overhaul of the system and toned down its rhetoric.

Following a meeting of energy ministers in Stockholm last month, Commission energy chief Kadri Simson said the debate is “moving on from last year’s discussions and converging on the need for a targeted reform.”

That’s not gone unnoticed by EU capitals.

“Maybe the initial intention was different,” said a diplomat from one EU country, speaking on condition of anonymity, adding that the proposal "seems to be less” interventionist than von der Leyen had previously pledged.

Diplomats from two other countries agreed that the reform appeared to be more scaled back than what had once been advertised, as the Commission comes under intense pressure to wrap up the reform rapidly.

Part of that time pressure also comes from EU capitals: France previously said it wants a reform done within “six months,” while a Spanish government official told POLITICO that the revamp “should be articulated urgently [in] 2023.”

German State Secretary for Climate Action Sven Giegold said in February that the bloc should opt for a “two-step” approach, with “no regret” measures prioritized before the 2024 election, and a “more systematic reform” left for later. Dutch Energy Minister Rob Jetten said he wanted “to make sure this reform is delivered this year.”

Still, speed appears to be the only issue all countries agree on.

Two camps have emerged: Spain and France want a deeper and more interventionist reform, while Germany, Denmark, Estonia, Finland, Luxembourg, Latvia and the Netherlands urge caution.

But the need for speed also means the proposal swerves some aspects that industry sees as critical for the EU’s clean energy transition, leaving the door open for a broader reform in the future.

That includes so-called capacity mechanisms, a way to remunerate power plants for the option of activating energy supplies when they are needed, for example when there is no wind or sun.

“It’s a pity” these weren’t included, said Damian Cortinas, a board member at ENTSO-E, Europe’s association for grid operators, saying that capacity mechanisms are the “best way to ensure that the right investment will take place to support further decarbonization and make sure power is available when renewables are not sufficient.”

Bruegel’s Zachmann added that “the expectation for a lot of people is that the next Commission will have to come up with some really profound changes because the electricity system will have to change drastically.”

But even the more limited reform will be difficult to complete in time, and the pressure will be on Spain and Belgium — which hold the next two rotating Council presidencies — to get a deal across the line.

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