The ten months that shook the foundations of the European energy architecture

“I’ve seen things you wouldn’t believe: burning ships beyond Orion.” If it weren’t for the final coda, that iconic final sequence of Blade Runner (1982) could well have been written thinking about what happened in the European energy sector in the year just ended. Nobody, not even the most ominous, could have predicted a war in Europe and such a transversal shock, from gas to electricity passing through fuels. But no one, not even those most in favor of introducing aggressive reforms in the operation of the energy markets, could have imagined that in less than 10 months there would be so many changes that, in turn, open the door to long-term reforms that Before, they weren’t even remotely on the most immediate to-do list.

They hang by force. The price explosion, especially in the electricity market, had started much earlier, in the summer of 2021. It affected, in the first instance, the southern countries of the Union —including Spain—, which since then began to study and demand containment measures at community level. But it was not until the Russian invasion of Ukraine, at the end of February last year, that the European Commission came face to face with reality: the energy crisis was not just a matter of security of supply, as Germany and the its satellites, but also prices. And something had to be done; those “things we wouldn’t believe”.

What has happened since then is the perfect example that, when there is political will, even the most firmly established foundations of the European regulatory structure can be removed. The supposed infallibility of the wholesale electricity pricing system was just that, supposed. That and other apparent truths sculpted in stone have been falling, one after another, with the ultimate goal of preventing the energy crisis from hitting families and businesses even more harshly and, ultimately, mutating into something else: in a true systemic crisis.

The President of the European Commission, Ursula von der Leyen, gave voice to this shift on June 8, just the day that Brussels gave the green light to the long-awaited Iberian exception, the mechanism that has allowed Spain and Portugal to separate —even partially—the paths of gas and light. “The electricity market no longer works. It is designed in the way that was necessary 20 years ago, when we started to introduce renewables. We have to reform it to adapt it to the current reality, in which renewables are dominant”, the head of the community Executive then slipped.

“There has been a very strong paradigm shift and, above all, very fast,” says Luis Atienza, former president of Red Eléctrica de España (REE). “Sooner or later, the debate on marginalism [el modelo por el que se retribuye a todas las fuentes de energía eléctrica al precio de la más cara] It was going to open yes or yes due to the growth of renewables: in some way, its end was already brewing, but this crisis has precipitated it, demonstrating that, thus, the market does not work when there is a price shock. That different rules are needed. Both in the electricity market and in the gas market, steps have been taken that seemed impossible ”, he affirms.

The Iberian mechanism is perhaps the best example of the Copernican turn in the opinion of the highest European spheres. And it constitutes a powerful precedent for the future: it is the first time in the history of the electrical system in which Brussels allows an exception of this caliber for two of its members. But there is much more. There is the system of joint purchases of natural gas, equally unprecedented. There is the cap on the price of oil that Russia exports to third countries – and the prohibition of community purchases of that crude. There is the recent cap on the price of gas in the wholesale market, a Rubicon that for months Berlin and The Hague swore and swore not to cross but which has been history for a couple of weeks. And there is, too, the unprecedented acceleration in renewables, with a new regulation that not even its most fervent defenders dreamed of and with an unprecedented consensus on what they are: the only real alternative for the EU to free itself from dependency energy and so that the trade deficit turns into a surplus.

“If they tell us a year ago, we don’t believe it. Markets have been intervened to a point that seemed unthinkable and, at the same time, we have seen an acceleration in the commitment to the energy transition”, assesses Natalia Collado, a researcher at EsadeEcPol who is an expert in regulation. “We are facing a great change of context: we must act on several fronts at the same time, but always maintaining a balance between the short term —consumer protection— and the long term —the movement towards renewable sources—. In that balance we continue to move ”.

More intervention in the markets

Atienza, one of the most respected voices in Spain in energy matters, is clear that Europe is moving “like it or not” towards “greater market intervention, with a growing role for governments and regulators.” “It will be necessary to adapt them so that they distort as little as possible and that competition is safeguarded to favor innovation and efficiency; but, without a doubt, more intervention will have to be done, ”she says. “If something has become clear in this crisis, it is that energy markets do not work on autopilot when things go wrong.”

What happened in recent months leaves more lessons. “We have realized how important energy markets are for the economy as a whole. When before had central banks paid attention to this? We were not aware of how vital they were for the proper functioning of everything else,” says Natalia Fabra, a professor at the Carlos III University of Madrid. “The markets have been intervened urgently, because there was no other option: it was only understood that something had to be done when electricity prices have skyrocketed. But it is just a tourniquet, which has broken the paradigms, yes, but it is still a tourniquet”, laments the also adviser to the Spanish Government for the reform of the electricity market.

Integral reform

With that “yet”, Fabra refers to the comprehensive reform of the European system, which will begin in the coming days, when the European Commission submits to a public hearing the main lines of its proposal for changes in the highly complex electrical bazaar, “the heart of the matter.” The objective: correct remuneration for energy, which maintains a fair balance between producers and consumers and, at the same time, encourages investment in renewables. “After 2022 of solutions to get out of trouble, 2023 should be the year of structural solutions in all energy fields,” he confides. “If the debt crisis [de hace una década] showed that austerity theory and reality work very differently, the energy crisis can end marginalism”.

Not everything has been positive paddling, of course. The shock has increased fossil generation —gas and coal—, triggering emissions from the electrical system. Germany has broken the bank and the deck of the common market with a lifeline of more than 200,000 million euros for their families and companies; It is more than half of what the Twenty-seven as a whole have put on the table and double what it would correspond to by GDP. Spain has launched —and withdrawn— an indiscriminate and regressive subsidy on automotive fuels, contrary to what international organizations of all kinds have been asking for for years. And practically all the Member States have had to reduce or liquidate various energy taxes to ease the pocket of consumers and stop the inflationary wave, with the consequent reduction in public income.

“The Commission has thrown itself into the bush and has chosen to give governments free rein and free rein,” closes, on condition of anonymity, a well-connected consultant in Brussels. “What happened in Germany, above all, is a paradigm shift: before, for anything discretionary that he wanted, the countries almost had to petition the Pope. From now on, many more things will be allowed, ”he predicts. Things you wouldn’t believe.