Europe is facing a unique opportunity – a paradigm shift in the current energy market. The European Union for the first time in a long time can untie the cost of electricity from the most expensive energy resource at the moment – gas. Bloomberg notes that, if successful, the solution to this problem will allow the formation of a completely new energy-independent “green energy” market, which in the future will finally decouple electricity prices from traditional energy resources. The EU will take key steps towards market development at the November 24 summit.
At the moment, electricity prices are pegged and determined through the price of gas on the market. The rising cost of electricity affects all areas of generation in Europe, including high-margin "green energy", the production costs of which are low. Record energy prices have a negative impact on the overall cost of electricity in Europe, although "green generation" does not depend on energy resources. The publication insists that the solution to such a problem is given "about once in a whole generation," but one wrong step can lead to a collapse in investment in new forms of energy.
Before making the final move towards green energy, Europe will have to solve several problems, one of which is the shortage of gas here and now. European countries are considering the option of introducing marginal gas prices, but this method has much more risks than possible surpluses, experts say. Moreover, if Switzerland and the UK refuse to join the mechanism, it will simply not work, since gas flows will flow to those markets where market pricing has been preserved.
“Don't try to fight the market. It is essential for risk management. Let the market determine the price first. But if you really want to introduce a restriction, do it as late as possible, ”Steffen Köhler, COO of the European Energy Exchange, told the publication.
To solve short-term problems, the EU is eyeing the so-called Iberian model, which is working in Portugal and Spain. Power generation companies that operate on gas are required to limit the prices of their products, however, depending on the market conditions, they have the right to partially pass the cost on to the consumer by raising tariffs. The Finnish energy company Wartsila Oyj believes that the extrapolation of this practice to the European market will reduce wholesale prices in the EU by 10-35%. However, the model is not ideal for those countries that are highly dependent on gas supplies, as too high costs will be redistributed to end consumers.
Another way to mitigate the impact of the cuts in Russian gas supplies needed for a smart green transition is to limit the “surprisingly large” revenues of energy companies. The EU has already agreed to impose a similar cap on all electricity suppliers, with a ceiling set at €180 per MWh from December to June next year. In this step, as the agency notes, the main difficulty lies – everyone is subject to restrictions: "green" and "non-green" energy companies – which reduces revenues and reduces investment, including in the "correct" industry.
“The biggest downside is that potential profits are being taken away from efficient, clean and cheap technology, which is bad for long-term investment,” says Fabian Ronningen, energy analyst at Rystad.
To speed up the energy transition, the European authorities should divide the wholesale electricity market into two parts: “green” and “non-green”, and impose a marginal price on electricity generated by conventional energy resources. A transitional mechanism is already in place in the UK through a 'compensation contracts' scheme for green energy producers that effectively locks in revenue stability for green companies, allowing them to increase investment and capacity. The transition to such a scheme will require European countries to create a developed system for transferring energy from one country to another, so that the risks of “bottlenecks” can be avoided.
Some analysts in a conversation with the agency expressed the opinion that the European market is quite mature and it does not need any additional incentives to rebuild on a "green" track. This opinion, for example, is shared by the head of the energy and hydrogen analytics department at ICIS, Sebastian Brown. He is convinced that the current market architecture will lead the EU to a "green future" by 2050.