Greeks pitch new electricity market model as fight over market reform intensifies
Posted On July 28, 2022
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With the EU subject to record-breaking electricity prices, leaders have tasked the European Commission with working towards a reform of a system they consider failed in order to decouple gas prices from electricity prices.
The EU electricity market prices electricity based on the most expensive source of electricity in the mix. With gas prices skyrocketing, electricity prices followed right alongside – prompting calls for reform. In May, EU leaders tasked the EU executive to “swiftly” work on the optimisation of electricity markets.
At Tuesday’s (26 July) emergency meeting, Greece presented its proposal, which seeks to bifurcate electricity markets, putting renewables, nuclear and flow hydro into one basket, and fossil fuel generation and stored hydro into another.
“The mechanism I propose would be more expansive, covering reductions in demand for several months rather than hours or days,” said prime minister Kyrios Mitsotakis in a letter sent to Commission President Ursula von der Leyen.
“To work, this tool would combine elements from energy market design—when, how much, for how long—and a way to compensate industry fairly,” he added.
The Greek proposal is hotly contested by experts.
“The proposal really means rolling back the very idea of electricity markets that we’ve been working on for the last 25 years in Europe,” said Lion Hirth, energy economics professor at Hertie School in Berlin.
“The price signals for the demand side would be deeply diluted, so forget about demand-side flexibility,” he told EURACTIV.
“Cappers” vs free-market orthodoxy
A representative from Romania said that they are in support of an optimisation of EU market design “in order to limit the spillover effect of gas prices on electricity.”
The Greek proposal was also quickly supported by Italy. “We totally support the idea, particularly this kind of decoupling,” said Roberto Cingolani, minister for ecological transition. The Greek solution “merits positive consideration,” added Cyprus.
France’s Ecology Minister Agnes Pannier-Runacher said she was “very interested in this proposal,” promising a future proposal in the form of a non-paper, and Germany’s Robert Habeck, minister of economy and climate action, thanked the Greeks for the “interesting” proposal “worth discussing.”
Spain’s Teresa Ribera, minister of ecological transition, said that “how to operate the market in exceptional circumstances and the debate on how the market is developing are two very important issues.”
Others were much less enthused about the prospect of an electricity market overhaul.
“If only the ‘cappers’ in the room speak up, I think you have to understand and there is a group of countries who have always championed the internal electricity market and know the value of it,” explained Claude Turmes, Luxembourg’s energy minister.
The “internal [electricity] market” is a huge asset, he added. “Let’s not throw out the baby with the bathtub.”
Denmark was also quick to criticise. “We really need to make sure that we don’t make decisions that have negative long-term consequences and ruin a system that is crucial to the green transition,” said Dan Jorgensen, minister of energy.
The Commission’s burden
“I can assure you that the Commission is very keen on having an open and in-depth discussion with all stakeholders and member states on any suggestions to improve the EU’s electricity market,” said Energy Commissioner Kadri Simson.
With the mandate from the European Council, the Commission will “conduct a full impact assessment of all options,” she added.
But, with the April report from regulator ACER concluding that the market was working as intended, the options to be assessed “will be significantly broader than [Greek Energy Minister] Kostas has presented here,” the EU executive official said.
Explicitly, she mentioned contracts for difference, which cap earnings in exchange for price stability, other types of long-term contracts, direct contracts with service generators that could benefit certain consumer categories and moving towards a “more granular locational pricing” model.
Following the granular locational pricing model, the cost of electricity in a certain area would be tied to its local availability.
In Germany, for example, which is currently one single electricity bidding zone, despite electricity being much cheaper to produce in the North due to ample renewable capacity versus the South, the market would be split, meaning residents in the north of the country might pay half of what those in the south pay for the same units.
The impact assessment of the options would come in October, while a legislative proposal should come next year, the Commissioner highlighted.
[Edited by Nathalie Weatherald]