Against the background of the war in Ukraine and a sharp rise in energy prices, the European electricity market has become the target of criticism from several presidential candidates. “Electricity tariffs are rising because Europe has tied French tariffs to other countries”, condemned Eric Zemmour on CNews on March 2. A week later, Valerie Pekress proposed to BFMTV. “as an exception, decouple by decree the price of electricity in France from the price on the European market, which is indexed to gas”. “I don’t want electricity, which is indexed to the price of gas, to grow as much”, also directed Marine Le Pen on TF1’s “Face à la guerre” five days later. How does this European market work? Does it really index the price of electricity versus the price of gas? Can it be reformed or withdrawn to reduce the bill for French households?
The European electricity market was created in the 1990s when the energy sector was liberalized and opened up to competition, recalls the European Parliament. Like all individual markets, this one has a clear goal: to equalize prices for all member countries and create a single wholesale price regardless of national production costs. Consequence: even if French producers produce electricity at a low cost, they sell it at the price of the European market.
“French, Romanian and Greek consumers have access to electricity that is priced the same.”Anna Creti, professor of economics at Paris-Dauphine University
The price of electricity is set based on the cost of the last source of energy used, experts interviewed by Franceinfo explain. In order to meet demand, production sources are used in order of increasing cost: first renewable energy sources (solar and wind energy), then hydraulics, nuclear power and, in case of high demand, power plants, gas. Therefore, when demand is high, for example in winter, the equilibrium price in Europe is based on the operating costs of gas-fired power plants, which are the most expensive.
This logic aims to ensure that the last used means of production return to their operating costs. “If we cap the equilibrium price at 70, whoever has a gas works worth 100 will refuse to put their product on the market when they are paid 70. However, we need these gas works since electricity cannot be stored. as a result, everyone is paid the same price”says Jacques Persebois, emeritus professor of economics at the University of Montpellier.
Problem: Gas prices have risen sharply in recent months, in part due to increased demand due to the post-COVID-19 economic recovery. The war in Ukraine pushed him even further. The base price for European gas, the Dutch TTF, reached a record high of 345 euros per megawatt hour on 7 March. It stays very high and carries electricity with it. It even reached, according to data provided by RTE, 700 euros per MWh a week ago, while it never exceeded 100 euros in the same period a year ago.
If this wholesale price does not quite correspond to the retail price (the one paid by the consumer), which also takes into account transportation costs and taxes, then it is nevertheless decisive in its formation: it weighs about a third. Thus, without the measures taken by the government, with the tariff shield, the consumer’s electricity bill in February would have increased by 1.5 times, Budget Minister Olivier Dussaud said in the Europe 1 program on March 11.
The main criticism expressed in France of this European electricity price structure is that it is problematic in terms of the French energy balance. In fact, gas accounted for only 6% of the French blend in 2021, compared to 69% for nuclear power, according to RTE. The situation that Marine Le Pen opposes to Germany. “We are also not going to pay for their dependence on Russian gas”, she was annoyed on BFMTV on March 1st. The criticism, however, is somewhat oversimplified.
In Germany, only 14% of electricity was produced from natural gas in the first half of 2021, according to the Destatis Institute, the German counterpart to INSEE. Coal (27%) and wind power (22%) were the main sources of energy on the Rhine, nuclear power accounted for 12%, Berlin bet mainly on these two solutions after it recorded the output of the atom at the end of 2022. The fact remains that France’s energy mix, which relies heavily on nuclear power, is very different from that of its European neighbors. “In Europe, gas accounts for 20 to 25% of electricity production”says Jacques Persebois.
The experts stress that for French electricity producers, which produce less expensive electricity than their European competitors, this overall price structuring is a tangible windfall financial benefit.
“Everything is sold at the same price as gas plants. So for those who produce cheaper, it creates income.”Jacques Persebois, economist
“This is a significant income. Without the price increase, EDF would not have made so much money.Anna Creti abounds. Even if EDF produces electricity for 60 euros, today it sells it for 500.”
Several presidential candidates have said they want to get out of this market (at least temporarily) or reform it. In the government itself, Economy Minister Bruno Le Maire qualifying in september on the public senate this system“abnormal” and D’“outdated”calling for “view it from top to bottom”. Is all this possible?
In any case, we will have to turn to the international energy market. “If we had a national market, we would not be able to cover the needs only from our energy balance”Anna Kreti explains. “In winter, it is very common for France to be an importer around 18:00 and an exporter in the middle of the day.”, explains Thomas Reverdy, Professor of Economic Sociology at the University of Grenoble. According to RTE, “2021 had 78 days with a daily balance of imports, i.e. 35 days more than in 2020″. DTherefore, in the short term, it is unthinkable to become self-sufficient in electricity.
“If we didn’t import electricity, we would have to build new equipment that wouldn’t work all the time and therefore wouldn’t be profitable.”Jacques Persebois, economist
Can we, however, leave this common market by continuing to import? “We could very well introduce a much more planned and regulated solution in France and continue to bargain with our neighbors at the wholesale price. This is exactly what a number of US states are doing. It is technically possible.”Thomas Reverdy says “We could import without going through the wholesale market, as we used to do with the border market. We could create a national market, where the price would depend on the country’s assortment, and limit the wholesale market to interconnections.replete with Jacques Persebois.
However, from a practical point of view, the reform of the common market would be extremely difficult. According to Anna Kreti, “it will take more than five years to reform or exit the market”. The same story from Jacques Persebois: “Reform can only be collective. If there is a reform, it will be coordinated.” With a decision to be taken unanimously it is hard to imagine that there will be a consensus among the countries included in it. Moreover, a number of countries, especially in Eastern Europe, are not interested in leaving this market.
First of all, a return to a single electricity market would, for many, cast doubt on the very logic of Europe. “If we question the electricity market, we question all common markets and even the principle of export and import”Anna Creti says
Leaving the market means questioning European directives, the single market… almost Europe.”Jacques Persebois, economist
How about a temporary exit “by order” as Valerie Pekress suggests? Impossible, experts interviewed say. “France no longer has to comply with European directivesexplains Jacques Persebois. Otherwise, you will have to invoke force majeure. But at that moment, some will say that they are leaving the gas market, others from the soybean or wheat market … It would be irresponsible.”
There is a much bigger solution An easy way to deal with rising gas prices, economist says: “The ideal short-term solution is to reduce demand during peak hours by finding incentives to consume less. If we reduce demand during this time, we will no longer need to turn to power plants. level, but it would be very effective.”