MAKE ELECTRICITY CHEAP AGAIN!
By Drakoulis Goudis
05/10/2024
In last week's article, we analyzed how the EU electricity market works, and delved into the reasons behind the exorbitant bills European citizens face in the last years. This week, we will present the potential solutions!
Make Electricity Cheap Again! would actually be a great slogan, appealing to the type of voters who want three-word solutions to multi-dimensional problems whose root causes can be traced decades in the past. In the real world, driving the electricity prices down is complicated, requires political and financial capital, vision further ahead than the next national elections, and for some governments to unbury their heads from the sand. Nonetheless, courses of action which can turn the tide do exist:
1. Reduce electricity consumption
Most people think that the less electricity they consume, the less they pay, linearly. Wrong. As we saw last week, and we can see in this graph by EPEX, energy demand determines which is the marginal plant needed to be connected to the grid so that supply meets demand.
In the graph, a demand of 79GW costs €15/MWh because all the demand is covered by solar, wind, nuclear and hydro. A demand of 81GW costs €55/MWh since the coal plant, which has a higher generation cost and carbon taxes, needs to contribute. A demand of 99GW is still at €55/MWh, but 100GW cost €70/MWh since gas enters the mix. It is evident that if the consumption at any moment is low enough that coal and gas aren’t needed; the price is much lower. Of course, this measure by itself won’t produce significant results because, well, we need electricity. But in combination with other actions, it can make the difference.
2. Remove administrative barriers delaying onboarding of renewable installations
It can be easily deduced from the graph that the larger the share of renewable energy in the grid, the higher the odds that the marginal price will be lower. We saw that bureaucracy, administrative and judicial delays, and conflicting regulations are delaying permits for building and connecting renewable energy plants to the grid.
This maze of red tape and inefficiency needs to disappear. As per the Draghi Report, the ways to achieve that are:
- EU-legislated Renewable Acceleration Areas (RAAs) and strategic environmental assessments for renewables expansion replacing individual environmental assessments per project, so that when a macro-environmental assessment in a specific region in the EU is made, all projects applying in the region would be green-lighted under the same process.
- Digitalization of the permit process, better funding of local and national authorities, automatic bypassing a level of authority when there is no answer after a predetermined number of days.
- A direct EU-level procedure for larger projects, to avoid judicial delays at local and national levels caused by corruption and NIMBYism.
- Updating the EU Environmental Legislation so that it is more flexible regarding renewable energy projects.
3. Investment in network upgrade, cross-connections and storage technologies
This needs to happen at EU-level, because the capital required is huge, the timeframe is in the decades (it’s a continuous effort), and the results usually invisible to the naked eye, which means national governments don’t consider it a priority. As we saw last week though, it is, because grid limitations and limited cross-country interconnection capacity force us to curtail production from solar and wind plants at peak production hours. The grid needs to digitalize, modernize, and the interconnections between national grids to multiply. Improved storage capacity would also reduce the need to curtail and would increase the energy reservoir ready to contribute to the supply when the demand is high.
This is one of the actions where long-term vision and political leadership are needed, because it requires ceding regulatory and budgetary power from the national level to EU level.
4. Nuclear Energy
The two words which cause Germany (and not only) to completely detach from reason. Nuclear energy (unlike hydro) doesn’t require a specific geography to be produced. It is not dependent on the weather conditions (unlike renewables) rendering it a firm energy source, suited to cover base loads (the load that is always needed, the minimum demand) as seen in the table from the European Parliament:
It is also significantly cheaper (apart from cleaner) than coal and gas. Extending the lifetime of existing nuclear plants (instead of shutting them down and replacing their energy output by Russian gas), facilitating the construction of new ones, investing in technology like Small Modular Reactors and funding R&D, are steps which can have a profound impact in the energy mix, therefore the electricity prices.
When the need for some leaders to unbury their heads from the sand was mentioned, the debate of nuclear energy is the no.1 topic which comes to mind.
5. End intra-EU gas procurement competition, strike long-term deals with exporter countries and incentivize usage of PPAs
Joint EU procurement of gas serving 1 security of supply rather than 27 would go a long way to reduce the price of a gas-generated MWh. Removing a layer of competition when you are the buyer is obviously beneficial and your leverage in the market is amplified. It facilitates striking more robust deals with trustworthy partners (Norway), and deals with better terms with countries the EU has a negotiating upper hand against (Algeria). The same principle applies to importing LNG from the USA.
We explained last week what PPAs are, how they would help shield consumers from the spot market prices of gas, and why they aren’t widely used. Financial incentives need to be given to industrial users to sign them, such as counter guarantees and specific financial products by the European Investment Bank. To put it simple, for PPAs to become more widespread, the gas exporters need credit guarantees that they won’t lose their money (if prices drop and the importer, bound the PPA fixed price, struggles to pay) and the importers need financial guarantees that they aren’t binding themselves to a potentially unprofitable price for years. Guarantees by the EU institutions (via various means) can address the worries both sides raise.
The importance of a joint EU strategy on gas cannot be understated: gas will remain the price-setter of the electricity market for years to come, even if the European governments start following all the other steps from tomorrow already. These changes take time, and while necessary as they are to secure a green, sustainable and affordable energy mix for the future of Europeans, they won’t yield results in a month or a year.
6. Harmonization of taxes and caps
When unexpected global events occur, creating volatility in the market, national governments react in different ways, including reducing the tax part of the retail price, capping the wholesale price of gas, etc. In an interconnected grid, uncoordinated reactions cause cascade effects which are counter-productive when every national entity does something different. Artificially altering the cross-border electricity flow is often the result, leading to even more chaotic pricing patterns and shortages. The relief measures to be implemented during crisis, as well as network tariffs and other taxes, need to be harmonized as much as possible across Europe so that there is a robust, uniform response, when necessary, which will also be fairer across the whole Union, minimizing local and national price discrepancies.
An Energy Union
The bold, swift and multi-level actions needed to guarantee cheap electricity to European citizens require massive investment and a regulatory and legislative overhaul. These actions are not financially feasible and will not achieve even half of the target results if they are implemented separately, uncoordinatedly, partly and halfway–which is exactly what will happen if the future of Europe’s energy remains solely at the hands of national governments. Conflicting national priorities and interests will get in the way, short-term stopgaps will be prioritized, the “every man for himself” logic will resurface at the first sign of trouble, the structural issues will never get addressed, and for most countries, the funding and credit trust will simply not be there.
Accelerating the path towards a true energy union, completing the journey that started many years ago, is the only way forward. The EU as a whole can yield way more power than any of its members individually, giving it a huge, unused so far potential in the market, and the capability of being a guarantor and creditor for European private actors. It also has the power to impose a common regulatory and administrative framework. The need for energy policy to become more centralized isn’t something isolated but part of the broader need for further European integration to address the challenges of 21st century, particularly in sectors in which serious financing is necessary.
The European governments owe it to their citizens to put their national insecurities and petty political red lines aside and use the power they already have by being members of the EU to reduce their monthly electricity bills and improve their quality of life.