Her Eleftherias Kourtalis
The options of the E.E. to support the energy market, UBS examines, concluding which solution would be the best for the region.
On Monday, European Commission President Ursula von der Leyen said “the surge in electricity prices now exposes the limitations of the current electricity market design” and promised “urgent intervention and structural reform of the electricity market”. The announcement lacked further details, but comes after forward prices jumped to over €1,000/MWh in Germany, €1,000 in France, over €600 in Italy and over £700/MWh in the UK. Energy Ministers are due to meet in Brussels, and according to reports, a package could be ready by October for implementation in January 2023. UBS is therefore looking at what the E.U.’s options could be.
What could the EU do?
Until now, governments have provided mostly ad hoc relief (adjustment of taxes on bills, vouchers or allowances for low-income households, some relatively modest caps and taxes on corporate windfalls). However, price increases have accelerated further, making these interventions insufficient.
Looking ahead, as UBS points out, a more structural solution could be to seek to decouple electricity prices from gas costs, which could be achieved in different ways (e.g. maintaining current markets but imposing a cap on natural gas prices, as EDF/Enel/Iberdrola argued in a letter in April, creating a separate “green power pool” as discussed in the recent UK consultation paper, or introducing CFD auctions for existing green energy assets). CFDs, known as Contracts for Difference, are contracts-trading instruments that follow the movement of natural gas prices and allow positions to be taken without owning the physical commodity.
An alternative option, according to UBS, would be to not tamper with market design, but for governments to freeze prices lower and make up the difference with public funds, repayable over a long period of time e.g. 10-15 years.
This would essentially be a “tariff deficit” model, as has been applied for many years in the Iberian markets, and as is now advocated, for example, by the UK Energy Union (although this could it’s expensive – Scottish Power (a subsidiary of Iberdrola) estimated the cost at £100bn over two years, for the UK alone).
The best solution
Which solution would be the best and most likely? UBS responds that it sees many advantages in the tariff deficit model, in particular as:
1) it could be introduced quickly (without changes to the functional market design) and
2) it is essentially a financing solution, which makes sense if we assume that the current shortfall in Russian gas is temporary and can be replaced in the coming years through the global LNG market.
However, the costs are high and can put pressure on governments’ balance sheets, as UBS points out.
Alternatively, the CFD model would use companies’ balance sheets to the same effect, but on a voluntary basis (a major plus for those opposed to market intervention).
However, according to reports the… scale is tipping towards the cap solution, with Germany possibly changing its position on it, and UBS highlights that a version of this policy has already been implemented and approved at Iberia, with a positive expected impact on the accounts and limited negative impact for the utility industry.
I am Derek Black, an author of World Stock Market. I have a degree in creative writing and journalism from the University of Central Florida. I have a passion for writing and informing the public. I strive to be accurate and fair in my reporting, and to provide a voice for those who may not otherwise be heard.