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EU plans electricity market 'structural reform'

August 29, 2022

The European Union is working on an "emergency intervention" to halt disparities in the electricity market as soaring prices reveal cracks in the system.

plug and socket
The EU is planning a reform of the electricity marketImage: Jens Niering/picture alliance

European Commission President Ursula von der Leyen on Monday said there were plans for emergency action to halt "skyrocketing" electricity prices in the EU. 

In the wake of Russia's invasion of Ukraine, EU countries have seen a spike in energy prices and  sought to cut their dependency on Moscow

The energy market "was developed under completely different circumstances," von der Leyen said in a speech at an international conference in Slovenia. 

The sharp rise in prices is "exposing the limitations of our current electricity market design," she said. 

"That's why we, the Commission, are now working on an emergency intervention and a structural reform of the electricity market," she added.

Energy ministers from the 27-member bloc are set to meet for an emergency meeting on September 9. 

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'Great readiness' for change among EU leaders

German Chancellor Olaf Scholz also echoed von der Leyen's remarks, saying that "it is necessary for us to make structural changes" to reduce electricity prices.

Scholz added that "there is great readiness to change something, and that seems to me to be very much mutual among the heads of state and government in Europe.''

"Clearly, what is currently being asked as a market price does not reflect supply and demand in the proper sense,'' he said at a news conference in Czechia, which currently holds the EU's rotating presidency. 

How are electricity prices set in the EU? 

Reform of the European electricity market could revise the so-called merit order mechanism, which determines electricity prices.

Under that system, the cheapest power stations are used first to feed into the grid, and, in ascending order, the expensive ones are last. 

However, electricity prices are set based on the marginal costs of the most expensive power stations. 

Currently, those expensive power stations are the ones using gas, which has risen sharply in price amid reduced supplies from Russia

This causes disproportionality, especially in countries that largely produce energy from cheap renewables, due to the difference between the actual costs of energy production versus the price consumers pay. 

A pie chart showing how sources of Germany's electricity production, 51% of which are renewables
Only 11% of Germany's electricity is produced with natural gas, for example

Berlin seems fond of keeping the mechanism while making tweaks to it. 

Beate Baron, a German Economy Ministry spokeswoman, said earlier that the merit order principle should stay, "but do away with the negative effects the merit order has, so that the high gas prices can no longer impact immediately and automatically on electricity prices.''

For instance, reform should allow customers to benefit from cheaper production prices for renewable energy, Baron said.

Czech Industry and Trade Minister Jozef Sikela said one of the proposals EU officials are considering is "putting a ceiling on prices of gas used in the production of electricity. This will be a functional and less costly solution that should reduce prices."  

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fb/nm (AFP, AP, dpa)