Germany and 8 other EU countries reject calls for market reform to curb energy crunch

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A group of nine EU countries, led by Germany, have expressed their outright opposition to the growing calls for far-reaching reforms of the bloc’s energy market, a cause championed by Spain and France to tackle the ongoing energy crunch and curb soaring electricity bills.

In a letter released ahead of a meeting of energy ministers, the signatories come out in defence of the free market and reject any “ad hoc reform” that can interfere with the existing rules.

Instead, the nine make the case for “temporary and targeted national actions” to protect vulnerable consumers and struggling companies that can be rolled out throughout the winter and then be gradually phased out in spring, when prices of natural gas are expected to decrease.

The statement was endorsed by Germany, Luxembourg, Austria, Denmark, Estonia, Finland, Ireland, Latvia and the Netherlands.

Their cautious, short-term approach was already proposed two weeks ago by the European Commission, which put forward a “toolbox” of targeted measures, such as income support, state aid and tax reductions, that member states can introduce to palliate the energy crisis.

The nine nations share the Commission’s analysis that the ongoing situation is mainly caused by basic market dynamics: countries recovering from the pandemic around the world are thirsty for energy to kickstart their economic activity but the stronger demand hasn’t been met by stronger supplies, leading to a pronounced hike in natural gas prices.

“As the price spikes have global drivers, we should be very careful before interfering in the design of the internal energy market,” they warn. “This will not be a remedy to mitigate the current rising energy prices linked to fossil fuels markets.”

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The group of nine say that, rather than pursuing reforms, the EU should focus on the deployment of renewable energy, the promotion of “market mechanisms” and the interconnection of electricity markets between member states to make the bloc more prepared to withstand price shocks.

“A well-managed energy transition is not the cause, but part of the solution to keep prices affordable and predictable,” they write. In recent weeks, countries like Poland and Hungary have attacked the EU’s climate policies for allegedly exacerbating the energy crunch.

Unconscious decoupling?

In the letter, Germany pours cold water on France’s pet project: the “decoupling” of electricity and natural gas prices.

Today, the wholesale market in the EU is based on a system of marginal pricing, also known as “pay-as-clear market”. Under this system, all electricity producers – from fossils fuels to wind and solar – bid into the market and offer energy according to their production costs. The bidding starts from the cheapest resources – the renewables – and finish with the most expensive one – usually natural gas.

Since most countries still rely on gas to meet all their power demands, the final price of electricity is often set by the price of natural gas. If gas becomes more expensive, electricity bills inevitably go up, even if clean, cheaper sources also contribute to the total energy supply.

This “coupling” of electricity and gas prices has been criticised by several member states, chief among them France, which gets most of its energy from nuclear plants, a homegrown alternative with more stable and predictable costs.

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In a joint letter published earlier this month, France, together with Spain, Greece, Romania and the Czech Republic, called for a reform of the wholesale electricity market, including the decoupling of prices.

“[The energy market] needs to be improved to better establish a link between the price paid by the consumers, and the average production cost of electricity in national production mixes,” they said.

But now Germany and the other eight countries have all but dashed their hopes with their new collective statement, which leaves no room for interpretation: rules should stay as they are.

“Transparent and competitive energy markets deliver efficiency and competitive prices to end-users,” the nine write, implicitly endorsing the marginal pricing method.

“We cannot support any measure that conflicts with the internal gas and electricity market, for instance and ad hoc reform of the wholesale electricity market.”

The exchange of letters deepens the divide between North and South on how to tackle the energy crunch, a problem that has turned into a political crisis fuelling social discontent.

Paris and Madrid will have to find more allies around the bloc if they want their reforming cause to succeed or, at least, remain on the table as a possible option.

Brussels has already taken sides: the marginal pricing method is “the most efficient for liberalised electricity markets and the most suited to foster effective electricity trading” between EU countries, the Commission noted when it released its toolbox.

The executive believes that, by making renewables the cheapest and most attractive option during the bidding, the system creates an incentive to switch to low-carbon technologies, stimulates innovation and reduces the need for state subsidies.

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The alternative model, the so-called “pay-as-bid” system, would enable all energy producers to offer the price they want from the market, not the price based on generation costs. This, Brussels says, would reduce transparency and lead to costlier bills.

However, last week, at the end of a two-day EU summit in Brussels, Commission President Ursula von der Leyen opened the door to a reflection around the current rules of the energy market.

“Is this combination [of all electricity sources] still the right one for the future or do we have to adapt? Because renewables and nuclear are homegrown, so we’re independent, while we import 90% of the gas we use,” she said.

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