Spanish government proposes segmenting electricity market in Brussels to prevent gas from contaminating prices

capital energy auction

The Ministry for Ecological Transition has informed the Council of Ministers of the proposed reform of the European wholesale electricity market that the government has sent to Brussels today. Following the economic measures that the Spanish government has proposed, and which Brussels “has accepted as its own”, according to the Secretary of State for Energy, Sara Aagesen, during the presentation of the proposal to the media, the “conceptual” debate on the future of the market is now open, specifically through a public consultation that the Commission will open next March. Spain is the first member state to send its guidelines, according to the newspaper Cinco Días.

The department headed by Teresa Ribera, recalls that both the European Council and the Council of Energy Ministers have raised the need to address a structural reform that takes into account the price signals. In this regard, it reiterated that when the current marginalist market was established, the energy mix was very different, as it was based on technologies with high variable costs that operated for a large number of hours. This clashes with the objective of reaching 74% of the generation mix being renewable or based on storage or demand-side management by 2030.

The aim of the proposal, which focuses on decoupling gas and coal from the marginal market, is to spread costs fairly and combine the existence of a short-term market with other capacity markets, controlled by the regulator. In other words, a more open, “liquid and transparent” market, combined with forward markets, with capacity services, in which the spot market will lose prominence to the forward markets and “the price will not be set by the latest technology”, as is currently the case with gas.

The proposal is articulated in several instruments that involve a segregation of the market according to the type of technology: for renewables, it proposes forward contracts for difference, something that is already implemented in Spain through auctions: they are signed by the regulator, the developer undertakes to supply energy for a period of time and, in exchange, the system guarantees the purchase. In contracts for difference, the price received is the market price; if it is cheaper than the auction price, the plant is compensated, and if it is not, the plant reimburses.

In the case of manageable renewables or renewables with storage capacity, they would be allowed some exposure to the market, which would provide an incentive for them to produce at more expensive times.

For nuclear and hydroelectric energy (mature energy sources throughout Europe), a regulated price is proposed to prevent them from receiving the “unfair remuneration” that they obtain under the current marginalist system. These infra-marginal technologies, which are manageable and flexible, will be guaranteed a return based on their costs. On the other hand, the contracts for difference will include an availability incentive.

In the case of marginal energies, such as combined cycle gas or coal-fired power plants, they will continue to operate in the marginal pool as before. In any case, all energies will have to pass through the day-ahead market.

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