EU promises ‘structural reform’ of energy market

The European Union is drafting emergency plans to intervene in its energy market, with the goal of addressing the soaring energy prices, as well as putting in place longer-term reforms to ensure electricity prices reflect cheaper renewable energy. 

“The skyrocketing electricity prices are now exposing the limitations of our current market design,” European Commission chief Ursula von der Leyen said. “It was developed for different circumstances. That’s why we are now working on an emergency intervention and a structural reform of the electricity market.”

Over recent months, the bloc’s 27 countries have disagreed over the possibility of an intervention in energy markets, as reduced Russian gas deliveries to Europe have pushed up power costs.

However, after gas prices reached costs almost 12 times higher than at the start of 2021, Germany’s economy minister has told other European energy ministers that the country is willing to consider a European price cap on gas, according to a text message seen by Reuters. 

German Chancellor Olaf Scholz said the discussion of potential measures to ease the cost of energy bills was the main topic of his meeting with Czech Prime Minister Petr Fiala, whose country currently holds the rotating presidency of the Council of the EU.

“It is necessary for us to make structural changes that contribute to prices sinking again quickly and there being a sufficient offer [of electricity]”, Scholz said at a news conference. “Clearly, what is currently being asked as a market price does not reflect supply and demand in the proper sense.”

A spokesperson for the Czech government said that a European price cap would “definitely be on the table.”

The remarks are a sign that the Commission has firmly broken with its earlier defence of EU power market design and follows rising pressure in recent months from countries such as Spain, Belgium and Greece to decouple gas and electricity costs. 

Currently, Europe’s electricity market is underpinned by a “merit order” system in which the power stations offering the cheapest electricity are tapped first, but prices are determined by the last and most expensive power stations to be tapped. As these are usually gas plants, cheap renewable energy is often sold at the same price as costlier fossil fuel-based power.

Speaking earlier in Berlin, a German Economy Ministry spokeswoman said that the idea is to keep the principle of the “merit order” system, “but do away with the negative effects the merit order has, so that the high gas prices can no longer impact immediately and automatically on electricity prices”.

Before Russia’s invasion of Ukraine, the nation supplied 27 per cent of the EU’s imported oil and 40 per cent of its gas, with the bloc paying around €400bn (£341bn) a year in return. That is equivalent to around 2.4 million barrels per day, according to data from the International Energy Agency. 

In May this year, the EU announced its intention to effectively cut 90 per cent of oil imports from Russia by the end of the year, in protest at Russia’s invasion of Ukraine. However, the measure has resulted in rising oil and gas prices across the bloc, which have led EU officials to request reductions in nations’ electricity use of as much as 15 per cent.  

In a debate later on Monday with German Economy Minister Robert Habeck, von der Leyen admitted that once the emergency measures are in place, the bloc needed “a fundamental reform of the electricity market.”