Easiest fix for Europe’s power market is to do little, study finds

Some European governments have proposed severing the link between gas and power prices. PHOTO: BLOOMBERG

BERLIN – Europe, for months planning a major overhaul of its power markets as a historic energy crisis rattles the economy, may find the best fix would be to let things largely remain as they are, according to a new study.

The European Union should refrain from big interventions, with only small changes required to better protect consumers and integrate renewables, according to a report by Berlin-based think-tank Epico and Oxford-centred Aurora Energy Research. It could provide some guidance to policymakers who next year have to make decisions that will influence the power market for decades to come, with a target for net-zero emissions by 2050. 

The bloc is planning to present market reform ideas in the first quarter of 2023. Russia’s deep cuts in natural gas supply to Europe have laid open the continent’s vulnerabilities and caused prices to spike, in the process driving up power rates to record levels this year.

As a result, some European governments have proposed severing the link between gas and power prices. Another plan called the Greek model seeks to create two different markets – renewables and some nuclear stations that will sell power based on production costs, while gas stations will depend on short-term prices. But all of these plans have disadvantages and don’t fully support the continent’s net-zero emissions path, according to the latest study.

Instead, policymakers should focus on improving cross-border energy flows, increasing flexibility and bring better hedging opportunities. At present, consumers do not fully profit from the low cost of renewables, and power prices are oriented toward short-term markets, the study said. 

That could be fixed with different pricing models to help vulnerable consumers and better integrate various power sources. The study proposes either tariffs based on consumption patterns or longer-term fixed-price retail contracts. To improve demand management, power tariffs could vary during the day, potentially forcing households to use less when it’s more expensive.

Industrial customers could also be incentivised to hedge their cost by improving on existing power purchase agreements, according to the study. It also proposes building out the contracts-for-difference (CfDs) that some like the UK use. The CfDs prevent wind farms from reaping massive profits from the high prices set by gas, and any excess funds are sent back to suppliers to subsidise consumer bills. BLOOMBERG

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