Berlin, Brussels join calls for ‘fundamental reform’ of EU power market

The German government last week said it was looking at decoupling gas and electricity markets as a way to curb rising power prices in Europe, a call later joined on Sunday by Brussels and Vienna.

The EU is in the midst of a “parallel crisis”, with sky-high gas prices pushing up the cost of electricity to unprecedented levels, a German government spokesperson said.

On Friday, prices in Germany climbed to €1 per Kilowatt hour while in France, year-ahead electricity prices soared to €1,130 per megawatt-hour, according to data from the European Energy Exchange.

To address this, the German government wants to decouple gas and electricity markets.

“I can confirm that the ministry is working on a fundamental reform and solution to curb rising retail prices for electricity consumers,” a spokesperson for the German Economy and Climate Action Ministry told EURACTIV on Friday (26 August).

The goal of the reform is “to decouple the development of end-customer prices for electricity from the rising price of gas,” the spokesperson added.

Electricity prices in the EU are driven by “marginal” production capacity available from gas power plants that can be fired up at short notice to meet peak demand. As gas prices surged on the back of the Ukraine war, this has pushed up the price of electricity too.

Yet, the price of renewable electricity has remained low, the spokesperson added, echoing remarks made last year by Spain, France and other EU countries, which have asked for decoupling gas and electricity markets.

Renewable Energy production is much cheaper than Gas.

“The aim is for consumers as well as industry to benefit more on their electricity bills from the fact that renewable energies produce so cheaply,” the German spokesperson explained. To finance this, Berlin wants to “address” the windfall profits that electricity companies have made from rising power prices.

These calls were reverberated on Sunday by the Belgian energy minister, Tinne Van der Straeten.

“Electricity is produced today at a price that is much lower than the price at which electricity and gas are sold. There is no longer any link between the cost of production and the selling price. This European electricity price formation system needs to be reviewed,” she wrote on Twitter.

In Austria too, Chancellor Karl Nehammer asked for decoupling gas and electricity prices after an emergency cabinet meeting on Sunday.

Scepticism

Energy experts, for their part, are sceptical, saying the market works as intended.

“Extremely worrying that people are always looking for new straws to solve the problems more easily than is realistic,” tweeted Veronika Grimm, an economist and independent advisor to the German government.

In response, Berlin sought to assuage the critics. “It is important to ensure that the functioning of the European electricity market is maintained and that the secure supply of electricity is also guaranteed,” the ministry explained.

“The merit order remains, but we change the problematic effects of the merit order for electricity customers,” the spokesperson added, saying the reform process was in its early stages.

Czechia, which holds the rotating EU Presidency, will convene an urgent meeting of energy ministers “to discuss specific emergency measures to address the energy situation,” the country’s Prime Minister announced on Friday.

Europe is in an “energy war with Russia,” Czech Energy Minister Jozef Sikela said.

Appetite for Reform Growing

The appetite for reform has grown since gas prices started rising in Autumn last year.

France and Spain were the first to call for a radical overhaul of the current marginal pricing system for electricity, with Madrid asking for “structural solutions” at the European level to decouple gas and electricity markets. They were backed by the leaders of Italy, Portugal and Greece, who urged the EU executive to address the “contagion effect” of high gas prices on electricity markets.

Yet, the German plan amounts to a rejection of a Greek proposal that was outlined in the summer, government sources told EURACTIV.

In July, the Greek government suggested to split the EU electricity market in two, with one market for “expensive” fossil-based generation and a separate market for “cheaper” renewables.

The proposal by Athens was positively received by Italy, Cyprus and France but met with scepticism from Denmark and Luxembourg who defended the current market structure.

“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, an energy economics professor at Hertie School in Berlin, in July comments made to EURACTIV.

The European Commission has acknowledged the need for reform, saying the current market system “does not work anymore”.

For a more detailed market analysis and advice on how to navigate your energy purchasing in the current climate please feel free to e-mail hello@gleg.co.uk.