European agreement on electricity market leaves essentials untouched: gas to continue to set prices with same marginalist system

red electrica cableado

There are no major surprises with the agreement reached yesterday by the EU energy ministers on the reform of the common electricity market. It follows in the wake of the European Commission’s proposal, with hardly any changes, maintaining the marginalist system and leaving gas to move prices according to the vagaries of the international context.

The ministers have broken the months-long stalemate between France and Germany over disagreements on the use of aid for energy investments, essentially what is considered “clean energy”. Such aid will be through a system known as Contracts for Difference (CfD), which allow governments to gain when electricity prices rise, because power producers must pay back some of the revenue, and when the price falls, generators are assured a minimum income.

In a concession to France, it will now “be possible to decide” to apply CfDs to investments for the “substantial repowering” of existing power generation – including nuclear – “by increasing its capacity or extending its lifetime”, according to the final draft advanced by POLITICO.

This could allow France to use CfDs to extend the lifetime of its older nuclear reactors. Macron’s government argued that its nuclear energy is not only very cheap, but that it supplies neighbouring countries. Countries such as Romania, Slovakia, Sweden and Bulgaria backed his idea.

But, in a nod to Germany, the countries also agreed that CfDs should be subject to certain “design rules” determined by the European Commission. Those rules should ensure that any redistribution of revenues “does not create undue distortions to competition and trade in the internal market”, says the document, where CfDs are not subject to competitive auctions. Ministers from Denmark, Luxembourg, Austria, Ireland and the Netherlands expressed their support for the German position at a public round table.

The proposal departs considerably from the one presented earlier this year by the Spanish government and remains a minimum agreement.
Like the European Commission’s proposal, it does not introduce any changes to the pricing system. What is more, the reform would remove all the emergency intervention measures approved in the last year, such as the cap on the profits of renewables and nuclear energy or the tax on the extraordinary profits of oil and gas companies.

And in the event of a new price crisis, the only measure that member states will be able to adopt is to regulate retail prices for households and SMEs.
Now there is still a need to negotiate with the European Parliament, which has already set its position in the spring.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.