Brussels plans energy market reform to curb renewables cost


Brussels plans to overhaul the bloc’s electricity market to prioritise cheaper renewable energy, European Union’s energy commissioner Kadri Simson has said, despite industry warnings that the reforms could smother investment in wind and solar projects.

The European Commission was under “very strong political pressure” to redesign the market to cut bills for consumers as the EU battles its most challenging energy crisis for decades, Simson said.

The commission was exploring how to bring the “benefits of a larger share of renewables” to consumers. “We will also need gas-fired power plants, but we don’t want to create a system where they will be in operation 24/7,” Simson added.

In a draft document outlining possible reforms seen by the Financial Times, the commission suggests making renewable power more reflective of its “true production costs,”given that once the infrastructure is built, the energy source for a wind farm or solar park is essentially free.

The draft document also proposes extending a windfall tax on renewable power companies, the proceeds of which are passed to consumers and which is due to expire in 2023.

The proposals to improve the bloc’s electricity market were made in response to pressure from several member states, notably France and Spain, which have urged the commission to end a system under which gas, the most expensive fuel currently in the bloc, sets the price for all power generated.

The model, known as the “merit order,”prioritises renewable and nuclear power to meet electricity demand first, followed by gas and coal. Prices are set by the final generator called on to meet demand, meaning renewable power prices are often pegged to the cost of fossil fuels.

While higher cost of gas has encourged investment in renewables, consumers still pay steep prices for renewable power despite its lower production costs.

Difficulties facing the bloc continue into 2023. The International Energy Agency has warned that the reduction in pipeline gas from Russia risks leaves the EU with a shortfall of 30 billion cubic metres of the fuel – about 7% of its 2021 consumption – over the year.

Renewables accounted for about two-fifths of European electricity production in 2020, with 36% coming from fossil fuels and 25% from nuclear, according to European Commission data.

Industry executives said Brussels’ proposals would undermine long-term contracts such as power purchase agreements (PPAs), which are based on average pricing over the contract term and ensure developers receive a return on their investment.

“Talking about reworking the electricity market to sweat out any imagined margins is the wrong thinking at a very critical moment,” said Ulrik Stridbæk, head of regulatory affairs at Ørsted, the Danish energy company.

Nick Keramidas, regulatory affairs director at Greek metallurgy company Mytilineos, said: “These PPAs can be worth hundreds of millions of euros because they can last 10 or 15 years. [When making investments] you need to make sure the market fundamentals will ... not change.”

Brussels has said it would issue a consultation on the possible reforms, and publish a full proposal by the end of March.

Simson acknowledged it was “not a good idea” to undertake major energy legislation in the midst of a crisis. Yet, “this is something that will define our electricity networks for decades. And ... we cannot treat it as emergency measure,” she said.

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