Why an electricity price cap is not so easy to implement?

We know a little more about the measures the Commission is considering to calm astronomical electricity prices through a leaked draft, a well-practiced exercise to test the waters without appearing to touch it (for the European Council of Energy Ministers).

The idea is simple, the execution less so: the wholesale price on the electricity markets would be capped at 200 EUR/MWh, ie three times less than the maximum prices observed in recent weeks, for energy producers who do not use gas in their power supply plants. For the Commission, with wholesale prices based on the marginal operating costs of the last (gas-fired) plant, these producers generate disproportionate revenues.

It is the implementation of this mechanism that will not be easy: the Commission proposes to calculate the difference between the price of EUR 200/MWh and the price at which the MWh will have been sold, ex post, ie immediately at the conclusion of the transaction on the wholesaler , to recover. market, or later if there is no other option. The Commission does not want a cap to be imposed on the exchange platforms themselves (otherwise, why maintain a power exchange: the wholesale price would be fixed indefinitely at EUR 200/MWh). The Commission also does not indicate whether the ceiling of 200 EUR/MWh applies to the average daily wholesale price or whether it is, for example, the price per hour.

This makes it possible, she writes, to maintain the merit of these subsidies: namely that the least expensive factories to operate (renewable) are commissioned first and thus the types of production pile up on their rising costs, promoting the cleanest energy . Maintaining the current system also makes it possible to mobilize, if necessary, gas-fired plants or electricity storage means (such as the Coo plant) to balance supply and demand, as they would continue to be remunerated at their real, expensive costs. The Commission will of course have to tackle the excessive gas prices elsewhere in order to reduce these costs.

Only energy producers based on wind energy, solar energy, geothermal energy, hydraulics, biomass, agricultural gases, biogas, nuclear, wastewater treatment gases, but also lignite and oil derivatives fall under the ex-post ceiling of EUR 200/MWh.

At this level of EUR 200/MWh, the Commission says, these producers continue to support themselves even if they earn less. This should not stop the projects for new virtuous means of production. Producers are also not allowed to close renewable energy plants. Installations that benefit from guaranteed prices (low because they were before the crisis) to inject electricity into the grid and thus cannot benefit from recent price spikes will also not be affected.

States to redistribute profits

It is up to Member States to recover and redistribute the excess income to consumers in need. These revenues will certainly serve as direct subsidies to consumers and their bills, but can be used to support investments in renewable energy, storage capacity, as well as in electricity transmission and interconnection capacity, always in compliance with the laws. It is as if the Commission is already considering that these emergency measures are permanent.

Keep in mind that these revenues cannot be used to support electricity bills other than those for households: companies will appreciate the development and will wait. A little later, in this draft, we read that this measure could apply to SMEs and that it is important to define what a home is.

How these revenues end up in consumers’ pockets is also not yet entirely clear: the Commission is talking about a subsidy to suppliers who have to supply power at regulated prices that are below their costs. Social rates should then fall into this category, which would alleviate the portion of the latter borne by other customers.

Why stay at the level of the wholesale markets?

If the Commission wants to act at the wholesale price level, it is to avoid the disparity between the states which, according to their more or less deep pockets and resources, may or may not come to the aid of their citizens. Aid measures, which are now at the discretion of states, also differ so much from country to country that we have a patchwork of aid measures that lead to distortions between countries. However, energy is an essential component for a country’s competitiveness. All Member States should support their markets in an equal way.

In France, this mechanism is actually not so new: since the 2000s, the government has been planning to purchase electricity to support producers in the wind and solar energy sector at guaranteed prices of around one hundred euros… with an opposite clause if the price of electricity is higher than the guaranteed price. We are largely there and the State is reaping the difference for the time being (high given the wholesale prices for electricity of several hundred euros per MWh). The rate shield has therefore already started financing, except that it is an accounting game with no direct revenue redistribution. In Belgium, this symmetrical approach was considered for offshore wind energy, but it was not adopted: the support price would have been higher.

The Commission does not yet specify how electricity futures contracts should be managed. It will not be easy with all the scenarios that arise. Should this measure be applied to futures contracts expiring now (at reasonable prices) and closing for the future. The price cap principle also gives a contradictory signal to attempts to promote dynamic price formation, that is, to adjust demand to supply with ad hoc price signals. Dynamic prices need volatility!

Limit the question

Another measure: limiting demand. Member States will have to commit to reducing their electricity consumption by 5% during peak hours, which have to be determined in advance. These peak hours should represent between 10 and 15% maximum of the hours in the month. This is probably a measure intended to limit the use of peak gas plants.

If the 200 EUR/MWh is accepted on Friday, we will have to see if this has an immediate effect. Prices can be high for many reasons, not just gas prices. Every country has its local problems that contribute to it. Nuclear power in France is at a standstill, the production capacity of the dams is limited, as is the wind due to the weather, and the demand for electricity is high, if only because of the air conditioning. It is also the fear of tomorrow that keeps prices high today. Will an indirect ceiling of EUR 200/MWh reduce fears of high prices tomorrow and help lower prices in wholesale markets? If not, will the Commission propose to mechanism already in force in Spain and Portugal, the great absence of this text while it is easier to implement: it is enough for the states to subsidize the gas used in gas-fired power stations.

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