EU leaders will meet this Friday to discuss a historic intervention in the energy market that may lead to price caps and other measures being introduced in order to limit the disruptions to consumers and industry from soaring and illiquid pricing markets. However, given the current limits on generation capacity, much of them due to Russia’s cutting off gas supplies, some sort of rationing plan may also be needed.
The draft that has been put forward by the Czech-led presidency of the EU and seen by several news outlets is focusing on five primary areas:
- Decoupling/limiting the impact of gas on the price of electricity
- Increasing liquidity in the market
- Coordinated demand reduction measures for electricity
- Limiting the revenues of non-gas electricity producers (ex. wind, solar and coal)
- Impact of the EU Emissions Trading System (EU ETS)
EU electricity pricing structure at the core of the problem.
Commodity markets tend to be priced at the margin, and so does electricity. This system basically means that gas-fired power stations often ends up dictating the wholesale electricity price for the rest of the market, even though renewable power and recently also coal, can be produced more cheaply. It is this market structure that in recent months with surging gas prices has helped drive power prices to previous unimaginable levels, peaking last Monday when German year ahead power briefly traded above €1,000/MWh, the equivalent of $1,700 dollars per barrel of crude oil equivalent.
Decoupling the price of power from surging gas prices has already been implemented in Spain and Portugal, two countries that benefit from having limited energy connections with the rest of Europe, as well as Greece. Across Europe such a system would work by charging non-gas power producers the difference between the agreed price limit and the actual market price - currently inflated due to high gas prices - that they receive for energy. The increased revenue from this surcharge should be shared among consumers while also support power generators forced to produce the marginal megawatt hour at a loss.