A blow to the European electricity market – GIS Reports

How not to react to an energy crisis: Replacing the EU electricity market with ill-conceived interventions is a recipe for longer-term problems.

The foundations of the European electricity market are threatened by confused activism. © GIS

One of the great achievements of the European Union is its internal electricity market, which has developed since 2009. It has paved the way for the liberalization of the energy sector and improved Europe’s energy security. Europe. Maintained by skilled market operators and dedicated engineers, the system created a balance of energy supply between and within countries through complex supply and demand mechanisms. But now everything is in danger because the politicians are making all the wrong choices.

Before coming to that, it is worth explaining some basic principles of the electricity market.

The objective of creating an electricity market is to secure supply, responsible electricity production and, finally, affordability. The EU electricity market sets electricity prices using an efficient mechanism.

how things work

A certain amount of electricity is needed in the grid at a specific time, but the demand fluctuates. The system will first include the cheapest offers, based on variable costs, then add other less efficient sources of supply until the demand for electricity is met.

The result is that the price of electricity (to the consumer and to all suppliers) is that offered by the most expensive producer at the time.

This system offers the advantage of rewarding investments in low-cost electricity generation, renewable energy and nuclear energy, which are also the most environmentally friendly. However, gas and coal-fired power plants must be activated during peak demand and periods when the sun and wind are scarce.

The electricity market functioned well, Europe did not suffer from blackouts and prices were affordable in most countries.

Another problem stems from inadequate transmission systems and insufficient supply caused by a negative attitude towards nuclear energy. The inability to modernize and expand the existing system, as well as the political dismantling of power plants, has exacerbated dependence on natural gas. As long as Russia supplied affordable gas to Europe, electricity prices remained affordable. However, this is no longer the case. Electricity prices and consumer bills have skyrocketed.

In some countries, especially Germany, electricity costs were high even before the 2022 crisis. This was caused by subsidizing the capital cost of some renewables through higher feed-in prices for the network. Overall, however, the electricity market has worked quite well; Europe suffered no blackouts and prices were affordable in most countries.

shameless populism

Today, pragmatic policies at Union and national level fall prey to confused activism. The actors do not hesitate to show stunning incompetence, whether it is a question of the technical and scientific bases or the iron laws of the economy. The causal relationship is totally ignored.

The European Commission and its President Ursula von der Leyen are pushing for a tax on the “excessive” profits of profitable producers. The inevitable result of such a proposal would be a reduction in investments in efficient and clean energy. The tax would sound the death knell for the proper functioning of the European electricity market.

Germany is Europe’s largest economy and, by extension, its largest energy consumer; it is painful to watch the exercises of his coalition government in this regard. The Green Party’s economy minister continues to insist on closing the country’s three remaining nuclear power plants by December 31 – but is generously inclined to allow two of them to remain ‘on standby’ for emergencies until the end of the year. the coming winter.

This position is absurd for two reasons. First, Germany and Europe can ill afford to give up this energy source, especially now. The second, even more alarming problem is that due to technical limitations, nuclear power plants cannot be turned on and off at will.

Europe is going through a crisis caused by incompetent leaders and unsustainable policies. It has been known for some time – the GIS has sounded the alarm on several occasions – that these two follies, the renunciation of nuclear power and the excessive dependence on Russian gas, pose enormous risks to the energy security of the Europe and its climate change mitigation efforts.


Facts and figures

Energy sources in energy production in Germany (first half of 2022)

Chart, fuels for power generation in Germany

The naïveté – mostly displayed by Berlin – that one can have a strong sanctions policy against Russia while relying on it for steady energy deliveries is hard to beat. For years, Berlin’s energy policy has been self-defeating. After the Fukushima nuclear accident in 2011, Chancellor Angela Merkel’s government seized the opportunity to make a political mark by hijacking the Greens’ anti-nuclear platform and ordering a gradual dismantling of Germany’s nuclear power plants. The tragic result is now fully visible: a “victory” for the Greens in which almost 30% of the country’s electricity production comes from the combustion of two of the most polluting fuels, coal and lignite (lignite).

What is there to do?

These days, in the frenzied discussions in Europe, one hears little about how to increase energy production at home. Politicians focus on price controls and designing stringent energy conservation programs to impose on the people. In its zeal, the European political body is ready to kill the tried and tested electricity market system. The “cap” of prices can help contain them in the short term, but will harm Europe’s energy security in the medium and long term. Administrative intervention will lead Europe to electricity rationing, blackouts, rising costs and continued reliance on burning coal. Surprisingly, such policies are offered by institutions that claim to be committed to sustainability.

Instead of falling into such centralizing ploys, Europe must work seriously towards more robust energy security and local energy production. Although I am a proponent of global markets, competitiveness also means strong self-sufficiency in critical supplies or diversified sources of supply. In our unfortunately even more fragmented world, this is essential.