Green energy is being driven out of the market

In the face of rising gas prices, which worsens the situation of traditional energy, the European Commission intends to introduce regulation of green generation revenue. New renewable energy sources and nuclear power plants will not be allowed on the market and will be forced to work under long-term contracts with a price limit. For older plants, regulators can set an artificial price ceiling of €180 per MWh. But the construction of renewable energy sources will continue, analysts say, since the proposed price cap is many times higher than the cost of building new stations.

The European Commission is trying to find a way to limit the cost of electricity from nuclear power plants and renewable energy sources. She wants to transfer all new objects to long-term contracts with limited final prices. For old plants, it proposes to introduce a market price ceiling of €180 per MWh. S&P Global writes about this with reference to the documents of the European Commission.

According to S&P Global, the EC proposes to oblige all new nuclear power plants and renewable energy sources to sell electricity under long-term contracts for difference in prices – Contracts for Difference (CfD). The price of the contract (strike price) will be determined at tenders, taking into account the actual production costs for the construction of the station. “CfDs are already being used in the UK, as well as in the EU to guarantee the investor’s income in the construction of renewable energy sources and nuclear power plants,” says Alexei Presnov, director of the Energy Analysis Agency. If the market price is below the strike price, the buyer pays the difference to the generator. If the market price is higher than the strike price, then the generator pays the difference to the buyer. CfD can be concluded with the government or in general with all consumers of the wholesale market.

Sergey Rozhenko from Kept believes that the proposal of the European Commission on the forced transfer of renewable energy and nuclear power plants to the CfD mechanism, in fact, involves the transfer of part of the generation to tariff regulation. “At the moment, such a measure looks like a logical step to reduce the infra-marginal income of renewable energy sources and nuclear power plants, since now the money actually goes to the income of energy companies without any reciprocal investment obligations,” he said. Nevertheless, the initiative could have negative consequences for the development of the EU’s common energy market – an integration process for which institutions and rules have been built for decades, as it introduces distortions in export-import trade between EU countries, the analyst warns.

However, even with a price ceiling of €180 per 1 MWh, the issue of excess revenues will still be a problem, as it is four to five times the cost of building renewable energy, says Sergei Rozhenko. The European Commission does not explain the price cap calculation in any way. This summer, against the backdrop of gas shortages in some countries, market energy prices exceeded €1,000 per 1 MWh, now spot prices on the Nord Pool market have noticeably decreased: the average price for delivery on October 26 in Finland is €148, in the Baltic countries – €154 , in France – €110, Germany – €121, in the UK – €78.

The issue of excess revenues for coal-fired generation, which also benefits significantly from high gas prices, remains unresolved. The share of coal in the production of electricity is commensurate with gas, recalls Sergei Rozhenko. A significant share of coal is mined in the EU with the same cost of production. Continuing the logic of the European Commission, it would be logical to cut off the excess income of Polish and Czech coal miners, who have become hidden beneficiaries of the situation, the analyst argues.

The proposal of the European Commission seems to be an urgent price containment measure, says Maxim Dyakin from Vygon Consulting. In his opinion, fuel-free generation will receive an additional incentive to conclude long-term contracts with stable returns. At the same time, the planned ceiling price level for renewable energy should be 20–30% higher than pre-crisis levels in order to compensate for the increase in CAPEX and OPEX that has been observed since 2021, he notes. In this case, negative consequences for the development of the RES sector can be avoided.

Polina Smertina