On 16 November 2021 I presented a European Federation of Energy Traders (EFET) point of view among distinguished speakers during a workshop on the European power price surge organized by Université Paris Dauphine - PSL Chaire European Electricity Markets.
Full intervention:
The current power price surge is the result of markets’ appropriate reaction to shifting fundamentals, signalling supply scarcity. The supply issue does not lie in the European wholesale power market as such, but rather in gas used by operators of CCGT generation units. Here one has to take into account Europe’s role as a swing market between Asia and the US under different prevailing market conditions, as well as the “circular” effect of having higher gas demand in the power sector due to intermittency (and thus higher gas prices.)
Against a backdrop of rising prices, households and certain businesses find it hard to pay their bills. Therefore, measures taken by national governments and NRAs to support particularly the most vulnerable households and businesses are necessary, to the extent that they are non-distortive, or least distortive, to the markets.
Prior to implementation of such measures, it should be taken into consideration that most consumers are not directly exposed to price volatility of the spot market. Certain categories of electricity buyers, notably industrial, large commercial and public consumers and retail supply companies, have the chance to buy power forward at fixed prices and/or use other types of contract, such as futures and options, to hedge their exposure to volatile wholesale spot prices. Such buyers account for a very large part of the total market.
Hedging techniques allow certain retail suppliers to offer fixed-price contracts to households (or else to change prices less often). Thus, the system in Europe shields customers from short-term price changes. Hence, any national measures should be proportionate to the extent that consumers are exposed to prices – which means that national governments and regulators will first have to reply to the question of which consumer categories are exposed to which prices.
If interventions are deemed necessary, the response to the affordability challenge needs to be carefully thought:
Temporary measures bringing an effective and immediate financial relief to consumers must be favoured. As stressed, measures directed to the most vulnerable households and businesses should be prioritized. The EC’s Communication on Energy Prices outlines pertinent measures, such as temporary deferrals of bill payments etc.
However, measures that modify market fundamentals – like the clawback measures on low-carbon generation enacted in Spain and Romania to which EFET recently reacted – are unhelpful: not only do they not have a direct relief effect on end-consumer bills; they also threaten market fundamentals in a way that:
Risks increasing wholesale prices in the short term
Damages the investment climate in the medium term – making any investment (in RES, new flexibilities) more expensive (or potentially too risky)
Undermines the ability of these countries to reach their decarbonization targets in a cost-efficient manner
This means that attempts to reduce prices in the short term, particularly those that involve a direct intervention in markets, may have a detrimental impact on all consumers in the long run.
In conclusion:
Markets are appropriately reacting to shifting fundamentals signalling supply scarcity.
Markets already help shield consumers from short-term volatility.
National measures should be coordinated and non- / least-distortive to the wholesale market.
Interventions jeopardizing market functioning will negatively impact consumers and will make it harder for Europe to find a least cost decarbonisation pathway.
Link to workshop program: http://www.ceem-dauphine.org/assets/dropbox/Programme_workshop_ceem_16112021.pdf