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What shape will Europe’s electricity market take?

A recently published factsheet outlines proposed solutions to the current energy crisis.

Climate Change and Environment
Energy

Gas and electricity prices across Europe reached record levels in 2021, and again shot up in 2022 following Russia’s invasion of Ukraine. The electricity price crisis has led many to realise that the current electricity market is no longer functioning optimally, opening the way for policy discussion on its future. The EU-funded GeoSmart project has published a factsheet providing insight into electricity market reform in a time of crisis. The factsheet can be downloaded through a link provided on the project website. The factsheet describes how, in response to the electricity price crisis, some Member States – first Spain, followed by Greece, France and Italy – have called for some of the electricity market’s rules to be suspended or adapted. As reported in the factsheet, in a European Council meeting held in March 2022, the Council invited the European Commission to “swiftly pursue work on the optimisation of the functioning of the European electricity market - including the effect of gas prices on it - so that it is better prepared to withstand future excessive price volatility, delivers affordable electricity and fully fits a decarbonised energy system, while preserving the integrity of the Single Market, maintaining incentives for the green transition, preserving the security of supply and avoiding disproportionate budgetary costs.”

Policy solutions

Energy prices are expected to remain high until 2024/2025. Therefore, the only way forward is a huge scaling up of renewable power and heat generation technologies combined with enhanced energy-saving measures and pricing that reflect the value of each source. However, as noted in the factsheet, “policy solutions, thus far, have strayed away from these solutions.” Many Member States have assumed the “nothing is broken” position, claiming that the electricity market is functioning well as it is. Others feel that the way it is structured is partly to blame for the price surge and have called for measures such as price caps and windfall profit taxation to ensure the crisis does not only benefit electricity producers. Another solution – proposed by Greece – is to split “the electricity market between a market with zero carbon sources remunerated based on CFD and a market with bidding-based price formation for other generators, especially fossil fuels.”

Commission proposals

The factsheet also outlines a number of Commission proposals. These include a coordinated reduction in demand during peak price hours, a revenue cap for lower-cost technologies such as renewables, nuclear and lignite, and a solidarity tax on fossil fuel companies. Additionally, the Commission proposes an expansion of the energy prices toolbox to “allow below cost regulated electricity prices for the first time and expand regulated prices to also cover small and medium-sized enterprises.” The GeoSmart (Technologies for geothermal to enhance competitiveness in smart and flexible operation) factsheet is rounded off with some key considerations for geothermal plants in the context of an electricity market reform. The project ends in 2024. For more information, please see: GeoSmart project website

Keywords

GeoSmart, electricity, electricity market, electricity price, energy crisis, geothermal

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