Less national control, more integration needed in EU’s ‘grim’ energy market

European politicians must surrender some national control over their energy systems to make the EU's interconnected electricity grid cheaper for everybody, says energy specialist and think tanker Conall Heusaff.

His slides on how to get power prices down are shown around Europe. Conall Heusaff, an energy analyst with Brussels-based think-tank Bruegel, has come up with the newest blueprint for the EU to get out of its electricity cost malaise.

Key takeaway: cooperation across EU countries will be essential as high power prices threaten to erode trust in governments, he told Euractiv in an interview.

How are things looking in European electricity markets? 

The current state of affairs is pretty grim.

We have very, very high prices in Europe, higher than in the last few decades for all types of consumers, industrial consumers, but also households. Everybody is paying more for energy and especially electricity.

Some say this threatens democracy.

I'm not sure if it is the biggest threat to democracy, but energy is an essential good, and you can't really do without it in social or economic life.

If it gets more expensive, that's going to have huge socioeconomic impacts.

When it gets to the point where people stop trusting their governments because of their inability to manage this, it will have deeper institutional impacts. 

How did we get here?

We are in a fossil fuel-based economy. Yet, Europe doesn't really have any domestic resources or any substantial domestic resources, and so we import all of our oil and gas.

We are exposed to global markets, and they have proven to be very volatile, especially as geopolitical instability increases. So they will continue to be volatile, as we learned the hard way when Russia stopped the gas flows.

If you're importing an essential good like energy, you're always going to be vulnerable.

How does importing gas drive up electricity prices?

Gas is a very important part of the European electricity system and is increasingly being used to cover the late afternoon peak demand hours when people come home, do the washing, and turn on their TVs. 

That activity is covered by burning gas, which is costly and forces us to pay other generators like hydropower the same price. 

And so you have this strong relationship between gas prices and electricity prices. 

No matter the pricing scheme, this link will be there as long as gas is a key part of the power system. 

Politicians, like Polish Prime Minister Donald Tusk, have suggested climate policies are at least partly to blame for high prices. Are they right?

I don’t think there is a direct link. 

EU CO2 prices are only a marginal part of the overall price the consumers pay. The Draghi report says it is less than 10%. 

So, not enough to explain the 350% EU-US price disparity? 

Absolutely not. But there is something to be said about widespread coal decommissioning and coal-to-gas switching that may have increased the market power of gas fired units, allowing them to charge higher prices. 

I wouldn’t say that’s because of climate policies, but rather failed electricity policy. 

Reducing coal power plants doesn’t have to end this way; politicians could have done better modelling and capacity adequacy assessments.

Since 2019, per MWh revenues of gas power plants have doubled. Are we completely at the mercy of methane? 

You would expect their revenues to double if their costs have also doubled.

But it's clear that we are in a system that increasingly moves towards a renewables based one, and our main source of flexibility to cover gaps of renewables is gas. 

And if you don't have sufficiently competitive markets, then those producers might charge you much more than the power is worth. 

I'm sure that that is happening in some European countries currently. Yet, the solution to that is not to roll back climate policy but to expand the flexibility in the system, more storage, more interconnection.

That's the transition we find ourselves in. In practice, how are the foundations of the electricity system changing? 

Structurally, we’re moving from a system that's based primarily on operational costs, mainly fossil fuels. Remember, Europe imports basically all of its fuel. 

We pump it into these generators, and that produces our electricity.

Then there are regular capacity costs, like cables and so on. 

Now we're moving to a system that's renewables dominated, that produces clean electricity, which means far less operational costs. Once you buy a solar panel or a wind turbine or a battery, you install it, and it sits there for thirty years.

So we’re switching from an operating cost system to one driven by investment costs. 

But with these investments being recouped over 30 years, the question is: who pays for this, when, and how much will fall on the consumer? 

We haven't got a clear picture at the EU or national level of how to put this whole puzzle together and then cut it up fairly for each different consumer type.

But it is clear that the allocation of cost is one of the key questions – alongside prices.

That leads to the central question: will my power bill go down in the wake of this transformation?

Prices can come down, by how much depends on several factors. 

If we continue to depend on fossil fuels, more relaxed global markets will bring prices down. 

But Europe will continue to be vulnerable, any period of lower prices will never be structural like that. 

If we switch to clean power, then whether prices come down depends in large part on how efficiently Europe builds the system.

If it is done in a messy, disaggregated and nationally focused way where every EU countries tries to cover every hour of the day with backup, then that will be much more expensive than a cooperative and coordinated European approach.

Besides that, a lot will depend on the future cost of key clean technologies. 

Which ones?

Prices for solar panels and batteries are falling exponentially – the cheaper they get, the cheaper power prices will be. 

That is not really in our hands, though. Either way, renewables will eventually hit a cost floor. 

And then there are trade issues: the world is on the brink of trade war, most clean power sources are imported – tariffs, disruptions could make it more costly.

But we will still be less vulnerable than today, where we rely on fossil fuel imports. 

The fact that power prices in the EU are so much higher is keeping politicians here awake at night. Can we bridge the gap this way?

In a best case scenario, Europe wakes up and says the way forward is electricity, in an integrated way. And we’re going to go all in: multilateral institutions that run the grid, and EU-level planning. 

Then we look for the most welfare-enhancing projects that could be built, usually cross-border projects: develop the North Sea in a cooperative and efficient way, loads of solar panels in Spain. 

As solar and batteries keep getting cheaper, we keep on trading with global partners. That would be the best-case scenario. 

Yet, you suggest in your latest paper that even this ideal outcome could leave power in Europe 50% more expensive than in the US? 

Where the price difference ends up is uncertain, but either way, prices are much higher than 50% right now, and at worst, we bend the curve down to an extent. 

Also, we are comparing continental-scale average costs. In that scenario, electricity in Spain, the Nordics, and Greece would be much cheaper than in many US regions – and energy-intensive industry would follow. 

So, the EU as a bloc won’t be able to match its competitors on average power prices? 

Unless we go all in on electricity, with a super efficient system and technologies get super cheap, while the US does not develop its system, fails to build resilience, and they get disrupted by climate change, then no. 

But who knows the future? These dynamics could change. Projecting energy prices twenty or thirty years into the future is hard to do. And there are scenarios where we are directly competitive. 

How do we get to this future? 

A lot of the gains are in the hands of European decision-makers. How we build up the system, how much we cooperate, how much we make use of our shared resources, it really depends on internal European decisions. 

It is not geopolitical uncertainty or the magic of innovation, but whether we can learn to cooperate efficiently. 

Meaning?

Power prices depend on political choices, now and in the future. In the short term, it's about what trade-offs politicians are willing to make between different consumers. 

In the long term, it's about whether politicians are willing to cooperate with each other and give up some national control over electricity systems for the sake of a more integrated, more efficient, cheaper European system.

(aw)