A heavy blow for the European electricity market – GIS Reports

How not to respond to an energy crisis: Replacing the EU’s electricity market with ill-conceived interventions is a recipe for longer-term problems.

The fundamentals of Europe’s electricity market are being threatened by confused activism. ©GIS

One of the outstanding achievements of the European Union is its internal electricity market, which has been developing since 2009. It paved the way for the liberalization of the energy sector and improved Europe’s energy security. The system, maintained by competent market participants and dedicated engineers, created a balance of energy supply between and within countries through complicated supply and demand mechanisms. But now everything is in jeopardy because the politicians are making the wrong decisions.

Before we get to that, it’s worth explaining some basics of the electricity market.

The aim of creating an electricity market is security of supply, responsible electricity generation and finally affordability. The EU electricity market sets electricity prices with an efficient mechanism.

how things work

A certain amount of electricity is needed in the grid at a certain point in time, but demand fluctuates. The system will first consider the lowest bids based on variable costs and then add other, less efficient sources of supply until electricity demand is met.

The result is that the electricity price (for the consumer and all suppliers) is that which is currently being offered by the most expensive producer.

This system offers the benefit of investing in low-cost power generation, renewable energy and nuclear energy – which are also the most environmentally friendly. However, gas and coal-fired power plants have to be switched on during peak load times and times when sunlight and wind are scarce.

The electricity market functioned well, Europe had no blackouts and prices were affordable in most countries.

Another problem arises from inadequate transmission systems and insufficient supply caused by a negative attitude towards nuclear energy. The lack of modernization and expansion of the existing system and the politically motivated shutdown of plants have increased the dependence on natural gas. As long as Russia supplied affordable gas to Europe, electricity prices remained affordable. However, this is no longer the case. Electricity prices and consumer bills have skyrocketed.

In some countries, especially Germany, electricity costs were already high before the 2022 crisis. This was caused by the subsidization of the capital cost of some renewable energy sources through higher prices to feed into the grid. In general, however, the electricity market functioned quite well; Europe had no blackouts and prices were affordable in most countries.

Shameless populism

Today, pragmatic policies at Union and national level are being swept away by confused activism. The actors don’t shy away from displaying an astonishing incompetence, be it with the technical and scientific basics or the iron laws of the economy. The cause and effect relationship is completely ignored.

The European Commission and its President Ursula von der Leyen are pushing for a tax on “excessive” profits made by cost-efficient producers. The inevitable result of such a proposal would be reduced investment in efficient and clean energy. The tax would mean the end of the well-functioning European electricity market.

Germany is Europe’s largest economy and thus also its largest energy consumer; It is painful to watch his coalition government’s exercises in this regard. The Green Party’s economy minister continues to insist on shutting down all three of the country’s remaining nuclear power plants by December 31 – but is generously inclined to keep two of them “on standby” for emergencies until the end of the coming winter.

This attitude is absurd for two reasons. First of all, Germany and Europe cannot afford to do without this energy source right now. The second, more worrying problem is that nuclear power plants cannot be switched on and off at will due to technical limitations.

Europe is in a crisis caused by incompetent leadership and unsustainable policies. It has been known for some time – GIS has sounded the alarm on several occasions – that these two follies of nuclear abandonment and over-reliance on Russian gas pose enormous threats to Europe’s energy security and climate protection efforts.

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facts

Energy sources in German energy production (first half of 2022)

Graphic fuels for power generation in Germany

The naivety, especially in Berlin, that one could pursue a policy of strong sanctions against Russia and rely on it for regular energy supplies can hardly be surpassed. For years, Berlin’s energy policy was self-destructive. After the Fukushima nuclear accident in 2011, Chancellor Angela Merkel’s government seized the opportunity to score political points by hijacking the Greens’ anti-nuclear platform and ordering a gradual shutdown of Germany’s nuclear power plants. The tragic result is now in full view: a “victory” for the Greens, with almost 30 percent of the country’s electricity generation coming from burning two of the most polluting fuels, coal and lignite.

What should I do?

Today, in Europe’s frenetic debates, little is heard about how to increase energy production at home. Politicians focus on mechanisms to control prices and devise rigorous energy-saving programs that they impose on people. In their zeal, European politicians are ready to kill off the electricity market system, which has proven to be effective. Price capping may help stop them in the short term, but will harm Europe’s energy security in the medium and long term. The administrative intervention will lead Europe to power rationing, blackouts, increased costs and continued dependence on coal burning. Astonishingly, such policies are produced by institutions that claim to be committed to sustainability.

Instead of falling for such centralist tricks, Europe needs to work seriously towards more robust energy security and local energy production. Although I believe in global markets, competitiveness also means solid self-sufficiency in critical supplies or diversified sources of supply. In our sadly even more fragmented world, this is essential.

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