Today the EU Agency for the Cooperation of Energy Regulators (ACER) issued its final assessment of the EU electricity market design. It comes at a time of volatile electricity prices and unprecedented supply insecurity linked to Russia’s invasion of Ukraine. Its core message is the EU must maintain its electricity price setting mechanism and preserve the Internal Energy Market, a key asset in dealing with the crisis. Earlier this month WindEurope published a new paper on electricity market design, stressing that investor certainty is essential to mobilise the massive investments needed to improve Europe’s energy security.
The very high electricity prices in Europe were initially fuelled by the increase in gas prices that came with the uneven global recovery from COVID. Russia’s invasion of Ukraine and its hostile approach to gas supplies to Europe have now worsened the situation. Europe’s energy consumers are taking a heavy toll.
In response the EU is now diversifying its gas supply and looking to massively ramp up renewables to improve its energy security. Europe still imports 58% of its energy – mostly fossil fuels and often from countries posing serious geopolitical risks. The EU wants to change this. The new REPowerEU agenda aims to end all Russian energy imports by 2027.
It also raises Europe’s wind energy target by 2030. It wants the EU to expand its wind capacity from 190 GW today to 480 GW by 2030. Behind that the EU Commission foresees 1000 GW of onshore wind and 300 GW of offshore wind by 2050.
This huge expansion of wind energy will only be possible if Europe has the right energy market design. Crucially this requires incremental improvements – rather than radical changes – to the current rules for setting wholesale energy prices.
“High electricity prices are really hurting households and industries across Europe. The EU and national Governments must support vulnerable consumers. But the measures they take must avoid tampering with the very rules of the electricity market. Radical interventions won’t address the root of the current problem – an overreliance on imported fossil fuels. Wrong measures will endanger investor confidence and deter investments in renewables, when renewables are the very energy sources we now need to be investing in”, says WindEurope CEO Giles Dickson.
ACER assessment recommends maintaining current price setting mechanisms
In 2021 the European Commission tasked the EU Agency for the Cooperation of Energy Regulators (ACER) to assess the design of the EU electricity market in light of rising electricity prices. Today ACER presented its final assessment. It identifies ways to future-proof market design, keep electricity affordable and ensure the integration of an ever-increasing share of renewables.
The ACER report finds that the EU’s current market design is “worth keeping”. It says governments should first apply targeted, direct support to vulnerable customers, such as cash transfers and VAT reductions. They should avoid distorting the market with measures like price caps, as proposed by Spain and Portugal. The reason for the current high electricity prices is the price of gas, not the market design, the report concludes.
ACER clearly advocates for the least interventionist policy options wherever possible. The report lists different measures according to their potential risk for market distortions. Windfall taxes are not among the most preferred policy options. Windfall taxes are difficult to implement, jeopardise investor confidence and might deter necessary investments in Europe’s energy transition.
The report shows that cross-border trade of energy and the integration of electricity markets brought €34bn a year in benefits over the last decade. A more integrated and interconnected European energy market is more resilient. Cross-border flows of electricity help to avoid curtailment or even blackouts and improve energy security.
The assessment also highlights the need to improve permitting, speed up the roll-out of electricity grids and increase flexibility options, in particular seasonal flexibility.
WindEurope’s position on market design
WindEurope welcomes the ACER assessment and calls on the European Commission to ensure that such input is taken into due account in future decisions. Short-term measures taken today must not undermine the EU’s long-term objective of climate neutrality by 2050. Uncoordinated and ill-designed emergency measures could roll back EU market integration, increase the overall cost of the energy transition and hamper Europe’s energy security.
“Ending Europe’s dependence on imported gas, oil and coal is crucial to ensure energy security and affordable prices in the long-run. As is the rapid expansion of renewables. Europe needs to build 35 GW a year of new wind energy to deliver its energy security and climate goals. This is much more than it’s currently building. We can build more if Europe fixes the overly complex permitting processes for new wind farms. But it’s not doable if Europe now starts fiddling with the basic rules for setting power prices”, says Giles Dickson.
Earlier this month WindEurope published a new paper on electricity market design.