The Government has proposed to the European Commission a profound reform of the EU electricity market that seeks to permanently limit the impact of gas on the price of electricity to try to reduce volatility and moderate the electricity bill. The objective of the measures, which will be sent to Brussels after being analyzed this Tuesday in the Council of Ministers, is to completely reverse the bases of the current system of marginalist price formation to corner gas, which has an excessive preponderance in the calculation mechanism, and guarantee stable income for renewable energies in a more regulated, more predictable wholesale market for consumers and generators. It also proposes intervening in the price of energy produced by nuclear and hydraulic power plants.
The reform of the electricity market is one of the great immediate challenges of the EU, which has seen how the energy crisis has had a devastating effect on the economy. Brussels is expected to release its proposals in March so that the community partners can start the discussion in the spring. The discussion promises to be complicated, with countries that are more in favor of not going back on the liberalization of the market that began more than two decades ago and others that defend greater intervention to control volatility. Spain has wanted to get ahead and has been the first country to send its measures. In parallel, the Executive will ask Brussels to allow it to maintain the gas price cap until the end of 2024, an exceptional measure that came into force in June to make electricity cheaper and that expires on May 31.
The key to the design outlined by the Ministry of Ecological Transition to reform the European electricity market is to prevent the price of gas from spreading to the rest of the energy and to start remunerating each source based on its generation costs. On the other hand, the current price formation system is marginalist and makes the latest technology that is incorporated into the market to generate electricity on a daily basis mark the price of 100% of the energy. When that technology is gas, which is very common, it has an extraordinary impact on the market as a whole.
The new proposal buries the current mechanism with a double weapon: a short-term market, both daily and intraday, mainly for gas and coal, combined with a medium- and long-term market that seeks to provide predictability. This second will be marked by contracts between regulatory bodies and renewable energy producing companies with a stable price. This formula already exists now, but it is a minority and voluntary one, and one of the main novelties is that it wants to be imposed on nuclear and hydraulic power generators, which have benefited from the high prices of the wholesale market despite the fact that they are plants amortized years ago and production costs are minimal. In addition, they would be paid an availability bonus. All supervised by the regulator decided by each EU country, which may determine the degree of intervention in the market.
The third leg of the proposal consists of capacity payment contracts, aimed at gas plants, for being available when necessary and boosting storage. Payment would be set at a competitive auction. According to Ministry sources, what is sought is to ensure long-term supply and achieve decarbonization objectives.
“The current model is not in a position to withstand stress like the current one, nor will it probably serve as a model for the future,” said the Minister for the Ecological Transition, Teresa Ribera, at the press conference after the Council of Ministers of this Tuesday. Ribera has admitted that this reform “is likely not to have immediate effects” on prices, but gradual ones. Sources from the Ministry consider that as the volume of energy contracted in term increases, the volatility of the price will decrease, although gas prices remain high.
The current electricity market was designed two decades ago and the system has become obsolete, according to the Government, because it does not adequately reflect the profound transformation that is taking place. Renewables were behind 10% of electricity production in 1998 and now account for an average of 50%. The goal is to reach 74% in 2030. However, the energy crisis has revealed that the marginalist price formation system produces a contagion effect that favors volatility.
These proposals will be sent to Brussels to be taken into account when drawing up the strategy that the Commission plans to present to the Member States in March. With this, Spain tries to mark the basis of a debate in which it has been a pioneer on issues such as the Iberian exception to limit . If there is no agreement in the first half of the year, the Government will mark this issue as a priority during the Spanish presidency of the EU, in the second half of 2023.
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