In view of the increasing demand for electricity and the growing share of renewable energies, a structural reform of the electricity market is necessary. In order to secure investments in the short term, the EU should set up a European fund that guarantees a feed-in premium for all newly connected wind and solar systems, write Conall Heussaff and Georg Zachmann.
Georg Zachmann is Senior Fellow at Bruegel, a Brussels-based economic think tank. Conall Heussaff is a research associate at Bruegel.
The electricity markets are in a period of unprecedented turbulence. The lack of French nuclear capacity and historically high gas and coal prices have put enormous strains on Europe’s energy system.
While the single market managed to deal with the physical shortages of electricity and gas, it was politically attacked because of the explosion in electricity prices across the continent.
This has prompted national policymakers such as Spanish Prime Minister Sanchez, French President Macron or European Commission President von der Leyen to push for a new electricity market design to lower electricity prices in the short term.
At the same time, structural reforms are needed to meet the challenges posed by rising electricity demand and growing shares of renewable energy during the zero-turn decades.
The redesign of the electricity market was therefore on the political agenda, regardless of the current crisis. The German project “Electricity market of the future” started in 2021.
And the last redesign of the European electricity market in the “Clean Energy for All Europeans” package from 2019 was still geared towards a 32% RE target for 2030, while the European Green Deal increased this to 40% and the Commission even proposed 45% in it RePowerEU plan.
It was expected that these would require much more ambitious targets Among other things Improving investment incentives for renewables and flexibility providers and enabling better integration of local generation, storage and demand options into an efficient European system.
The short-term political need to act against skyrocketing prices and the long-term desire to adapt market rules to new challenges currently overlap. The entanglement of the two goals carries the risk that the long-term efficiency of a framework is not sufficiently taken into account if the political discussions are fixated on ensuring lower prices this year.
But even if that risk is mitigated by addressing short-term concerns about price levels with temporary contingency measures like redistributing unexpected gains to consumers, while allowing more time for structural reform, a crucial timing issue remains: securing investment in the years to come 2023 and 2024 .
Already in the first quarter of 2022 the International Energy Agency recorded the lowest auction volumes for photovoltaics and onshore wind power since 2016. The massive political intervention affecting the returns on existing assets and the very uncertain prospects for a future market design risk delaying important investments.
Investors may prefer to wait for new market mechanisms that offer longer-term visibility into returns, while financiers may be reluctant to provide new money to wind or solar project developers when the market value of the electricity produced may be severely impacted by the new rules will .
The problem is: we have no time to lose. Electricity delivered to European futures markets in 2023 is worth more than twice as much as electricity delivered in 2025. And for gas, the emergency premium is even higher.
Therefore, in addition to contingency permits, a premium for connecting new power generation assets in 2023 and 2024 could offset near-term risk and encourage investors to pull all levers to accelerate deployment when it is most needed.
For example, Europe could set up a European fund that would guarantee a feed-in premium for all newly connected wind and solar plants, in addition to any other cash flows they would receive on a regular basis.
If this fund provided 3 cents per kilowatt hour for the first connected gigawatt of wind power and 0.05 cents per kilowatt hour less for each additional gigawatt for 10 years – so 2.95 cents per kilowatt hour for the second and 2.90 cents per kilowatt hour for that third gigawatt – there would be 60 GW that get a bonus.
Doing the same for solar energy would support 120 gigawatts of installed capacity. Together these would produce around 240 TWh per year. This European feed-in tariff would €3.5 billion a year.
If only ten percent of the subsidized output were actually additionally subsidized and the corresponding 24 TWh per year reduced European electricity prices by just 1 cent per kilowatt hour, European consumers would save a total of 25 billion euros per year.
A first-come, first-served mechanism to encourage accelerated deployment of wind and solar energy in uncertain times could be of significant benefit to European consumers. Implemented at the European level, it could also address some of the distributional effects that could tear European unity apart at times of intense energy crises.
This certainly isn’t a substitute for efficient market design to address the challenges of a rapidly decarbonizing energy system – but it can help buy the time it takes to design it properly.
Comments are closed.