The EU’s electricity market and why soaring gas prices are driving bills higher

Soaring gas prices have pushed up energy prices across Europe, putting the EU electricity market in the limelight.

The pricing method has been criticized not only by member countries, but also by Spain and France. The main request for change To protect consumers from rising costs, President Vladimir Putin has blamed rising gas prices for the EU’s decision to phase out long-term contracts in favor of market-based prices. There are some in.

However, the European Commission has resisted the pressure of major regulatory changes on the EU energy market 30 years ago. Brussels has unveiled an optional “toolbox” to deal with price spikes, such as direct income support and tax cuts, but avoids promising a radical overhaul of pricing rules.

EU Energy Commissioner Kadri Simson Protected the system For paving the way for market liberalization and encouraging investment in green technology.

Why is the electricity bill going up?

According to EU figures, the average household electricity bill in Europe is categorized into tax and VAT costs (about 35%), network operator costs (30%), and energy unit prices (about 35%). .. Energy Regulatory Agency Cooperation Agency (ACER).

At the heart of complaints from some countries is the EU’s energy pricing system. It works with the general “pay on clear” model. In this model, the wholesale electricity cost reflects the price of the last energy unit purchased at an auction held in a member country.

In general, gas is the fuel needed to ensure that enough energy is supplied to meet demand.

Therefore, even in countries like France, where cheaper nuclear power supplies about 70% of electricity, gas is still pushing up wholesale electricity prices. And as gas prices soar, so does the price of electricity.

Who will benefit from the mechanics of the market?

The EU energy market has been accelerating the transition from long-term contracts for fossil fuels such as oil to less carbon-intensive natural gas and renewables purchased in the spot market since the late 1990s, throughout Europe. It has helped reduce prices.

Prices are based on changing supply and demand dynamics, so Europe experienced negative prices when supply far outweighed the decline in demand, especially at the start of the 2020 Covid-19 pandemic. Between 2019 and 2020, European households saw a 20% reduction in gas costs, according to Eurostat figures.

Jan Cornillie, a research associate at the European University Institute, said the EU energy market “has been offered at very low prices for years,” but at the confluence of recent factors (mainly). “This is the first time, not in our favor,” said (outside the control of policy makers).

“The lesson is not to completely abolish the design, but to add an insurance mechanism at high prices,” Cornillie said.

Brussels also tightly protects models that it states are important for achieving ambitious climate goals and accelerating the transition to renewable energy.

Marginal prices mean that all suppliers in the market, including cheaper wind or solar equipment, receive the price paid for the most expensive offer accepted and benefit from capital-intensive technologies such as renewable energy. Means to bring. “The market is not dominated by big companies and can accept small renewable energy facilities,” Simson told the Financial Times.

Is there an alternative?

Finance Ministers of France, Spain, Romania, Greece and the Czech Republic have made drastic changes to “better establish a link between the prices paid by consumers and the average production cost of electricity in the country’s production mix”. I’m looking for.

The Commission has promised to evaluate how this possible “unlinking” can be achieved.

EU Energy Commissioner Kadrisimson

EU energy commissioner Kadrisimson said the system paved the way for market liberalization and encouraged investment in green technology © AFP via Getty Images.

However, the desire for drastic change is low. Changing marginal pricing rules also requires time-consuming EU law. Many member states, including Germany, the Netherlands and Scandinavia, may resist major legislative changes in the face of rising prices, experts say they will decline by early 2022.

“To that extent [the price surge] This is a temporary phenomenon, so the response must be temporary, “ACER director Christian Zinglersen told FT.

Will a better energy stockpile make any difference?

One of the solutions Brussels is working on is to find ways to increase the EU’s natural gas sourcing and storage capacity and smooth price fluctuations when demand is high. “Volatility is likely to stay here and we need to work to accept it,” said Zinglersen.

Only about 12 member countries have their own strategic gas reserves.

In contrast, the EU already has strict regulations on emergency oil stockpiling. Each member country must maintain crude oil equivalent to 61 days of consumption and continuously report inventory levels to Brussels.

However, the EU’s move to establish joint gas purchases and storage can suffer from technical challenges and high costs. Natural gas is stored in underground reservoirs and the market is dominated by commercial players, including Gazprom in Russia.

“Only a few member states can provide storage on a sufficient scale, raising the difficult question of how to divide costs among them,” said Christian E. of the Center for European Policy Research. Genhofer and Irina Kustova said.

Energy Commissioner Simson said on Wednesday that Brussels would propose a “voluntary” system for joint storage and procurement, encouraging countries to participate, but not creating mandatory rules.

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The EU’s electricity market and why soaring gas prices are driving bills higher Source link The EU’s electricity market and why soaring gas prices are driving bills higher

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