Brussels is planning an overhaul of the energy market to curb the cost of renewable energy

Brussels is planning an overhaul of the energy market to curb the cost of renewable energy

Brussels plans to overhaul the bloc’s electricity market to prioritize cheaper renewable power, the EU’s energy commissioner said, despite industry warnings that the reforms could stifle investment in wind and solar farms.

Kadri Simson said the European Commission is under “very strong political pressure” to reshape the market to cut bills for consumers as the EU battles its most challenging energy crisis in decades.

“We work under extraordinary circumstances and deliver [the reforms] Faster than what the committee usually does,” she said in an interview.

Simson said the commission is looking at how to bring the “benefits of a greater share of renewables” to consumers. “We will also need gas power plants, but we don’t want to create a system where they will be in operation 24-7,” she added.

In a draft document outlining possible reforms, seen by the Financial Times, the committee suggests making renewable energy more reflective of its “true production costs”, given that once the infrastructure is built, the source of energy for a wind farm or solar array is essentially free.

It also proposes to extend the sunrise tax on renewable electricity companies, the proceeds of which are passed on to consumers and which should expire in 2023.

The proposals to improve the bloc’s electricity market come after months of pressure from a number of member states, mainly France and Spain, who demanded the committee put an end to the system according to which the most expensive fuel in the bloc – currently gas – sets the price for all electricity. was created.

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The model, known as the “order of merit,” prioritizes renewable and nuclear energy to satisfy electricity demand first, followed by gas and coal. Prices are determined by the final generator called to meet the demand, meaning that renewable electricity prices are often pegged to the cost of fossil fuels.

This promoted investment in renewable energy, which benefited from the higher cost of gas, but caused consumers to pay high prices for renewable electricity despite its low production costs.

EU politicians have argued that last year’s record increases in European gas prices and a growing number of clean energy projects have undermined the system.

The bloc faces ongoing difficulties in 2023. The International Energy Agency has warned that the reduction in pipeline gas from Russia could leave the EU with a shortfall of 30 billion cubic meters of the fuel – about 7% of its consumption in 2021 – during the year.

Renewable energy accounted for about two-fifths of electricity production in Europe in 2020, with 36 percent coming from fossil fuels and 25 percent from nuclear power, according to European Commission data.

Wind turbines in Spain
Wind turbines in Spain, one of the prominent supporters in the European Union of decoupling gas prices and renewable energy © Angel Garcia/Bloomberg

France, the EU’s largest producer of nuclear power, and Spain, which generates almost half of its energy from renewables, have been the most vocal supporters of gas decoupling and renewable pricing.

Industry executives said Brussels’ proposals would undermine long-term contracts such as power purchase agreements (PPAs). These are based on average pricing over the duration of the contract and ensure that the entrepreneurs receive a return on their investment.

“Talking about reworking the electricity market to sweat every conceivable margin is wrong thinking at a very critical moment,” said Ulrik Stridback, head of regulatory affairs at Orsted, the Danish energy company.

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Nick Karmidas, director of regulatory affairs at Greek metallurgical company Mytilineos, said: “These PPAs can be worth hundreds of millions of euros because they can last 10 or 15 years. [When making investments] You need to make sure that the fundamentals of the market are in place. . . don’t change.”

Christian Zingelsen, head of EU energy regulator ACER, said long-term changes must provide “the right investment signals for all the new construction needed to carry our accelerated and ambitious energy transition”.

Brussels has announced that it will open a consultation on the possible reforms, and will publish a full proposal by the end of March.

The wind tax was among several emergency measures taken by the European Union last year to ease the energy crisis. The European Union asked the member states to reduce gas consumption by about 15% and approved a temporary tax on oil and gas companies.

A cap on the wholesale gas price, to prevent it rising again to the August peak of €300 per megawatt hour, was signed by ministers in December.

Norway, which replaced Russia as the EU’s biggest gas exporter after Moscow’s full-scale invasion of Ukraine in February, has criticized the bloc for potentially exacerbating the supply problem.

“Price caps do not solve the basic problem that there is a shortage of energy in the European market. If you put a price ceiling, there is a risk that it could make the basic situation worse,” said Amund Wick, Secretary of State at the Ministry of Petroleum and Energy.

Simson defended the cap, saying Brussels would not have proposed it “unless we were convinced that we had to do something so that European consumers could avoid it [high prices]”.

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It also denied that a corruption scandal involving allegations of bribery between Qatari lawmakers and the European Parliament would harm the bloc’s energy contracts with the Gulf state. Qatar was focusing on a regasification terminal due to come online in Germany in 2025, which should not be affected by the case, she said.

Simson admitted it was “not a good idea” to push through major energy legislation in the midst of a crisis. But, she said, “this is something that will define our power grids for decades. And . . . we cannot treat this as an emergency measure.”

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