How the EU stopped being afraid and broke its energy market

In the past two months, the mild anxiety carefully concealed by European politicians due to rising gas and electricity prices has gradually turned into a panic.

As soon as wholesale energy prices in Germany exceeded the psychological mark of €1,000 per 1 MWh last week, representatives of most European governments proposed reforming the European energy market. “We need a new electricity market model that really works,” European Commission President Ursula von der Leyen said on August 29, noting that the old model “was created for different circumstances.”

The crux of the problem is that in the EU, as in most major energy markets, the wholesale price depends on the price of the last supplier. If it is required to cover the daily morning peak of consumption, the system operator first accepts applications from sources with the lowest operating costs – hydroelectric power plants, then wind and solar stations, nuclear power plants, then coal-fired thermal power plants. If their production cannot cover demand, gas stations have to be turned on, whose energy is now very expensive due to high fuel prices. As a result, it turns out that it is the cost of gas generation that determines the wholesale prices for electricity. Therefore, many European politicians propose to “untie” the price of energy from the price of gas.

There are two ways how this can be done. The first is to limit energy consumption so that you do not have to turn on expensive gas blocks. The problem is that gas-fired thermal power plants are technologically ideally suited to operate at peaks in consumption and at times when wind and solar output drops due to weather conditions. If you do not turn on the gas blocks at all, on a cloudy and calm day, or even just in cold weather, you will have to go to rolling blackouts.

The second way is to introduce a cap on the maximum price of electricity and, at the same time, a mechanism that will reduce the cost of purchasing energy from stations with low operating costs. In other words, wind farms will receive less money than they could by subsidizing unprofitable (in terms of price limits) gas generation. This is quite ironic, since for a long time the European energy market worked exactly the opposite way.

The third way is to do nothing and let the economic mechanisms do their job. Given that an offshore wind turbine needs a price of €30 per 1 MWh to pay off, at current levels it would pay off in less than a year – it is difficult to imagine a better incentive for the development of green generation, which the EU authorities so dreamed of. True, you cannot build an industrial wind farm in three months, and electricity bills that have grown many times are coming to consumers in Europe right now.