How does the European electricity market work, which the EU wants to reform?
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FOCUS- Under pressure from member states, led by France, the European Commission announced on Monday that it was working on “a structural reform” of this market, in order to stem the rise in prices.
France ended up winning. For many months, French officials, led by Emmanuel Macron, denigrated the functioning of the European electricity market. A subject that first divided the Twenty-Seven, before French opinion finally won. As a result, European Commission President Ursula von der Leyen announced on Monday that the EU was working on “structural reform” of this marketin order to stem the current surge in prices.
“Soaring electricity prices clearly show the limits of the current functioning of the market“, acknowledged the head of the European executive. The announced reform will be on the menu of a meeting of EU energy ministers, scheduled for September 9 in Brussels.
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On several occasions in recent months, Emmanuel Macron like Bruno Le Maire have attacked the European electricity pricing mechanism, believing that it was at the origin of the explosion in prices. “Our countries today are victims of a price formula and basic assumptions that no longer correspond to reality“, Estimated Monday the French president. Last June, the tenant of the Élysée had developed his thinking. “You have skyrocketing electricity prices that no longer have anything to do with electricity production costs, it follows gas, it’s absurd. This means that you have players, for example in renewables, who make totally unreasonable excess profits during the period“, he had denounced at the end of the G7 summit in Germany.
At the time, the Head of State recalled his proposal to “change the operating rules of the electricity market», Pushed since the end of last year at European level and included in Emmanuel Macron’s program for his second five-year term. “Having carbon-free electricity whose price is indexed to fossil fuels is economically stupid and revolting from a climate point of view“, had pressed Bruno Le Maire on CNews, calling for”raise your voice” while excluding leaving this market – a proposal formulated in particular by Marine Le Pen during the presidential campaign.
SEE ALSO – Energy: the EU is preparing “a structural reform of the electricity market”, announces Ursula von der Leyen
The price determined by a gas plant
The observation made by the French government on this wholesale market, based on the economic law of supply and demand, is correct. But it is necessary to understand the springs. “The price is set by the production cost of the last plant used to meet the demand», explains Thomas Pellerin-Carlin, director of the Energy Center of the Jacques Delors Institute. The cheapest generation sources are called first, in this case renewables and nuclear, and finally coal and gas, as demand increases. Thus, in France, the wholesale price is generally determined by a gas plant, most often located in Germany.
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This is why the spike in gas prices, which has been observed since the fall of 2021 – caused by the post-Covid economic recovery and aggravated by the war in Ukraine – has mechanically driven up electricity prices. This pricing mechanism is justified by a simple observation. Let’s imagine that the electricity tariff is lower than the production cost of the last plant called. The operator of the latterwould have no interest in making it work», Underlines Jacques Percebois, professor emeritus of the University of Montpellier and energy specialist, because he would lose money. As a result, there would not be enough electricity on the network and blackouts would therefore be inevitable.
Fixing the wholesale price at the level of the marginal cost of electricity is therefore essential to balance the market. A system which, indeed, may seem unfair for countries like France, which depends little on gas to produce its electricity (6% of the electricity mix in 2021, according to RTE), compared to the European average (around 20%). Nuclear power being its main source, up to nearly 70%.
Interconnections between national networks
But the European market also has its benefits, experts point out. The interconnections between the various national networks allow France to import electricity when it needs it, in particular during winter consumption peaks. “France is a net importer of electricity at peak times», notes the economist Jacques Percebois. Conversely, “when France is an exporter, the market contributes to EDF’s economic balanceadds Patrice Geoffron, director of the Center for Geopolitics of Energy and Raw Materials (CGEMP) at Paris-Dauphine University.
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Note that the wholesale price on the European market does not correspond to the retail price paid by the consumer. “It is only one of its elements“says Jacques Percebois. The regulated sales tariff (TRV), proposed by EDF, can in fact be broken down into three thirds: taxes, transport costs and the production of electricity itself. It is in this last component that we find the wholesale price, alongside the cost of EDF’s historical nuclear production, called ARENH.
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