The EU in a hard gas crisis: what reform of its internal electricity market? PART II

In this article, Jean-Michel Glachant analizes what reform of the EU internal electricity market should be put in place in the current hard gas crisis

 It makes sense to look at a reform of the EU internal electricity market to strengthen it against future energy shocks. Three main pillars appear significantly able to strengthen the EU electricity market. They are:

  • long-term contracts for price hedging;
  • long-term contracts for energy delivery; and
  • long term contracts for capacity remuneration.

These three new pillars do not weaken our EU global strategy of accelerated decarbonisation and fast electrification. There is no fundamental conflict at stake here, only adjustments and care. 

It has to be noted that these three components of the reform do not touch the core of the existing EU coupling of national electricity markets, which are the short-term markets for energy and (in some sense) for reserves. The future EU electricity market design could therefore have five market pillars: the three types of long-term contracts and the existing two types of short-term markets (energy ahead & balancing reserves). One must also note that to address the other issue of deeper decentralization (typically pushed by prosumers and flexsumers), other new markets will have to be built and nurtured, by adaptation to the very special – including local – characteristics of their products, nature of their trade agreements, and governance. 

This new configuration combining long-term contracts, short-term central markets and local trade is not a surprise discovered during the European crisis. Leading electricity researchers at MIT arrived at the same conclusion in their studies of the main consequences of the push for decarbonisation in the US sector. Both in the US and in the EU, we are entering a new era of ‘electricity hybrid markets’ combining private and public, centralized and local, dimensions. What the EU adds to this general finding is a need to build a strongly independent European energy security when accelerating its decarbonisation push and electrification pull. 

However, reforming the EU internal electricity market around a five to six pillar architecture cannot guarantee the success of our core European aims. 

The EU also needs a much stronger policy with both transmission grids and distribution grids, and several other types of infrastructure such as storage and flexibility assets. Without these new infrastructures, the European policy of higher RES targets and deeper electrification cannot be fully implemented both on time and with the expected effect of market price softening. However, it is the Member States and not the EU authorities which hold most of the key decision-making rights in these key areas (long-term contracts for hedging, energy and capacity; local trade; transmission and distribution grids plus other infrastructures). It is unlikely that the already existing coordination tools at the EU level can easily deliver both increased energy security and an accelerated energy transition and electrification (see Tubiana et al., 2022). New governance tools have to be found and implemented soon because the current EU crisis is a very serious one, threatening even our European industrial and economic future. We have seen that uncoordinated national rushes to fill gas storages can push market stress and prices too far. We have not seen yet a solid planning of options and a robust study of a minimum set of European infrastructures needed to reach our ambitious EU targets for 203O and 2050. And, at these horizons, we also have to assume a fully electric European mobility sector… 

Unfortunately, other conditions for success are not guaranteed. The European Central Bank is tightening its monetary and financial policy while many investments that the EU needs to multiply are fixed-cost assets, very sensitive to the interest rate. Furthermore, the national finances of the Member States are deteriorating due to their enormous budgetary support for the consumption of energy and fossil fuels. The coming years do not promise any growth in fiscal revenue. And the ‘green macroeconomics’ of progressive recovery through public expenses and investments does not have an easy hand against direct redistribution of revenue to the vulnerable, the losers and many other potential  plaintiffs. It is also likely that, after such a crisis, the general European aim of a ‘just transition’ will have to be seriously reviewed to keep legitimacy and credibility in the public. 

However, the EU has no other way forward to address the many industrial, economic and social challenges it will inevitably face during the 30 years to 2050. The EU literally has a war to win against itself: either it wins it and reinvents a bright future for itself; or it lets the other major world powers decide what the EU is allowed to become. 

 

Reference: 

Tubiana Laurence, Jean-Michel Glachant, Beck Thorsten Harald Leopold, Ronnie Belmans, Colombier Michel, Leigh Hancher, Andris Piebalgs, Nicolò Rossetto, Rüdinger Andreas, Runge-Metzger Artur (2022) 

Between crises and decarbonisation : realigning EU climate and energy policy for the new ‘state of the world’ | Florence School of Regulation (eui.eu) 

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