The EU electricity intervention package – What can we expect?

Responding to recent news about the comprehensive market intervention package currently being discussed in the European Union, Miguel Marroquín from Our New Energy has the following comments:

 

”Overall, I think all this turmoil and considerations around the market design is coming quite late; these issues have been apparent for a long time, including at times when market prices did not support the investment into renewables.

It is now obvious that the current marginalistic fuel-cost, merit-based mechanisms designed decades ago do not help the average consumer.

“Market design does not work anymore” tells us something about the desired purpose of the market from the speaker’s perspective. Further, its proposed ‘solution’ tells us something about the understanding of how the market truly works and what needs to be fixed.

Across Europe, renewables have been seen as the solution to the energy trilemma (the quest for sustainable, reliable, and competitive energy), yet these have always only been half-measures: We offered considerable incentives to deploy RES, which at times have been overly generous, at the expense of taxpayer’s energy bill. This was instrumental in creating the demand and the space for technology costs to reach market parity. However, we have been failing to empower and greet market-parity renewables, and there were never real incentives for the industries and consumers to ‘electrify’ their consumption. Hence, we still have a dependence on third-party fossil fuels.

With the dawn of market-parity over the course of the past 5 years, there have been numerous discussions in the industry concerning ‘captured’ prices, curtailment, the introduction of negative pricing, ancillary services, PPAs, saturation in agencies delaying the development of RES, and many other problems related to these.

Back then, these were not a priority for EU and national officials. Last summer, when electricity prices were in the 70-100€/MWh, I saw a journalist on TV saying such prices were the ‘toll to transit to a renewable-based system’… Recently, a close friend reports being in a room with an EU Energy Minister and his counsel and overhearing the sentence: “PPAs are neither regulated nor feasible here.”

With this understanding and spirit, it’s no surprise to read about discussions on market intervention of unprecedented proportions that are still leaving a number of important unknowns and considerations open. These include:

  • The new intervention package is proposed to introduce a price cap only on infra-marginal technologies (which is less a change in market design and more a discriminatory intervention into a portion of the market). Now, will consumers still pay the marginal price? Or the weighted average offering price? How exactly will the savings from introducing this cap result in a reduction of the energy bill for consumers? Because if not through the market-based portion of the energy bill, it might simply result in a pot of money redistributed arbitrarily, and that is not a great start for a transparent, democratic, and meritocratic process.

 

  • Nobody will disagree that any newly introduced policy should never undermine the access to energy and the plans to decarbonize Europe. I wonder what message it sends to investors in energy transition to see their plans persistently brought to question by ideas such as these?Last year, Spain’s Royal Decree-Law 17/2021 on natural gas prices (RDL 17/2021) required immediate revisions. It risked rendering thousands of mega-watts bankrupt because it overlooked how the mechanics of this decree-law interact with ‘private’ PPAs. If revisions had not been made, the country would have missed this tool to render investments in renewables bankable. As for the ‘effect’ of Spain enjoying a lower electricity price than its neighboring European markets, for those reading from abroad, this is thanks to another synthetic concept: The cap on gas price ­– but only for electricity generation. We let households and industries pay the full market price for gas but then compensate ‘behind the market’ for the difference between the real and caped gas price. That is how the ‘visible’ value of electricity market price is reduced, thereby limiting revenues for inframarginal technologies. An act worth of David Copperfield. Are we about the repeat that act?

 

  • Lastly, EU officials are weighing the creation of a ‘new bank’ to foster investment in hydrogen generation. I speak daily with investors in energy transition, and have yet to hear there is a shortage in capital. So how is a new bank solving a problem? And since hydrogen is produced through electrolysis which requires electricity, it only makes sense if that electricity is NOT produced with fossil fuels. Therefore, transiting to a hydrogen-based economy requires investing in renewables – like A LOT of renewable! Should policies not focus on making that transition possible? Or are we determined to re-regulate the market and waste the efforts of the past decades to liberalize it?

 

Overall, this new electricity market reform seems reactive, and we fear it won’t aid the consumers nor the green energy transition. Worst case, it will require officials to deploy an abundant patchwork in due time, cause damages to the industry, and ultimately require to tap from their endless source of capital: taxpayers.”

 

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