30 Aug 2022 | 08:23 UTC

EC preparing emergency power market intervention: von der Leyen

Highlights

Current design 'not fit for purpose'

Short term fix, then longer term proposals

'All schemes have drawabacks': Piebalgs

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The European Commission is working on an emergency intervention in the electricity market limit the damage of soaring power prices, EC President Ursula von der Leyen said Aug. 29 in a speech to the Bled Strategic Forum in Slovenia.

The benchmark German year-ahead power contract on EEX settled at Eur760/MWh Aug. 29, down from a record Eur985/MWh Aug. 26, exchange data showed. The contract broke through the Eur500/MWh mark for the first time on Aug. 16.

"The skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design," von der Leyen said.

The market developed under different circumstances and was no longer fit for purpose, she said.

"That is why we, the Commission, are now working on an emergency intervention and a structural reform of the electricity market," she said. "We need a new market model for electricity that really functions and brings us back into balance."

A near-term intervention is most likely to take the form of cap on the price natural gas used in power generation, followed by a more formal splitting of the market between non-gas and gas sources to reduce the influence of the marginal unit of generation on overall prices, commentators said.

"We would expect for the short term a price cap mechanism using the "Iberian exception" as a reference (a cap at up to Eur70/MWh gas for power generated from hydro, nuclear and non-regulated renewables, as allowed in Spain and Portugal through a 12-month exception period)," JP Morgan European utility analyst Javier Garrido said Aug. 30.

This could result in a price for "infra-marginal" technologies (non-gas, with lower running costs than marginal gas units) of around Eur200/MWh, Garrido said.

Longer term, auctions for the vast majority of unregulated hydro, nuclear and renewables' production in Europe would allow for a decoupling of achieved prices for these sources versus the short-run marginal cost in the system (set by gas) "and would price this power based on the long-term all-in cost of the technology," he said.

Spain, Portugal and Greece were in favor of intervening in power markets to reduce the influence of the marginal gas unit while the Netherland and the Nordic countries tended to resist such calls, ex-European Commissioner for Energy Andris Piebalgs said Aug. 30 in an interview on BBC Radio.

"Political pressure to do something is immense, but capping is going to be difficult because there is no good scheme – every scheme has lots of drawbacks," he said.

Piebalgs, who is now adviser to the Latvian president and a professor at the Florence School of Regulation, said European regulatory body ACER had already looked at power market design and found it essentially sound.

"To take a measure like Spain or Portugal, capping gas prices for electricity, requires huge subsidies -- and those subsidies are at national level. It's really difficult to find a mechanism that is sound and will not destroy long term demand and investments," he said.

One positive was that European gas stores are now over 80% full, and there had been agreement at EU level to reduce gas demand by 15%, he said.

Meanwhile European energy ministers are due to convene in Brussels for an extraordinary council on Sept. 9, according to the Czech Presidency of the EU.

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