Electricity prices are soaring, and the culprit seems to be the construction of the European electricity market. This market "cannot be described as functional if it leads to such high prices", says German Chancellor Olaf Scholz. Once the architecture of this market is changed, the chaos should give way to a lull. However, in reality, there is no system that allows for the decoupling of gas and electricity prices on a European scale. Indeed, the correlation is based on the physical reality that 20% of electricity production still comes from the combustion of gas.
In addition, the market price adjusts to the cost of starting up the latest power plant connected to the grid. "The whole market adjusts to its price, because you have to pay the producer who starts it up at the moment T, since electricity cannot be stored. If this were not the case, the producer would have no incentive to put it into operation, despite an imminent need on the network," explains Jacques Percebois, economist and director of CREDEN.
However, the start-up costs of gas-fired power plants (which make up the balance of this market) have soared, while physical electricity generation capacity has shrunk. France, in particular, has closed many of its capacities, from the Fessenheim nuclear plant to polluting coal-fired power plants... without replacing them with equivalent means of generation. Moreover, the country is currently facing, at the worst possible moment, a historically low availability of its nuclear fleet.
This problem primarily affects France, which, in a situation of low production, must import electricity and is therefore subject to this rule. If the country had a surplus, it would not be subject to the now famous European wholesale market rule.
Spain and Portugal, which are autonomous overall, have subsidized their gas-fired power generation, but have not decoupled. Thus they have managed to post a much lower price per MWH than their neighbors. At least for the moment...
The European Commission, which must react, seems to be moving towards a smoothing option by capping the price per MWh for certain electricity producers whose production costs are lower than those of gas-fired power plants. In other words, it would mean taxing part of the remuneration of nuclear power plants or wind and solar farms, in order to free up resources to finance measures to reduce energy prices for consumers. But this solution has many perverse effects.
Since the suspension of the interconnected market at the level of the 27 is excluded, another option exists: it would be possible to use an average of marginal costs to set the price of electricity, rather than the marginal cost per hour of the last infrastructure commissioned. This would be tantamount to subsidizing the last plant to come on line.
Such a mechanism could, a priori, still make it possible to mitigate the effect of soaring gas prices on the price of electricity on a European scale, without disconnecting the two parameters.
Nothing is simple in a context troubled by the conflict in Ukraine, but also inherited from the Covid crisis.