Rising energy prices require urgent structural revamp of EU policy

Rising energy prices require urgent structural revamp of EU policy

Rising energy prices threaten EU industrial competitiveness, erode workers’ purchasing power, bring more citizens into poverty, and might fuel inflation. On the occasion of this week’s EU Energy Council, industriAll European Trade Union stresses that while the EU is revising its entire climate policy framework, it is vital to create conditions to secure the supply of affordable decarbonised electricity.

The European Commission has published a ‘toolbox’ of measures that the EU and its Member States should implement to mitigate the impact of the current price hike, but it lacks clarity on the drivers setting prices on the EU electricity wholesale market.

Gas cannot be the price setter on the electricity wholesale market

The ’pay as you clear mechanism‘ exacerbates the impact of gas prices on the price of electricity.  Such a system leads to situations where the price paid to a large majority of electricity producers is far above their production costs.

This raises the question of the price-setting mechanism needed in an energy system that must supply enough affordable decarbonised electricity. Securing decent payback time is important to incentivise investment in the supply of decarbonised electricity, but this cannot be achieved at the expense of the demand side.

Keeping prices artificially high on the wholesale market may entail a series of consequences that could hamper the electrification of a series of sectors which is needed to reach the EU climate objective. The market uptake of electric vehicles or the creation of markets for hydrogen-based steel depend inter alia on the supply of affordable clean electricity. Keeping electricity prices so closely linked to gas prices might delay, if not jeopardise, this objective.

The current price-setting mechanism is a source of puzzlement in an EU which is a regulated market economy, where competition law is enforced on many dossiers, and where the Treaty ascribes the objective of ensuring a high level of consumer protection.

How can the EU keep a mechanism that de facto secures to utilities a price so above their production costs and which exposes final consumers to unjustified price hikes? Does this not create the perfect conditions for major conflict of interest, since keeping a share of gas fire power plants in their portfolio allows utilities to maximise the profits made from other sources of electricity?

The carbon price set by the ETS exacerbates this risk, since the higher the carbon price, the higher the price of electricity on the wholesale market, whatever the technology used.

The mechanism leads to massive windfall profits for utilities and an increase in the price on the retail market. Many of the other components of the retail price set at national level are often based on a percentage of the electricity price sets on the wholesale market (VAT, excise duty). As a result, the final price of electricity is impacting disproportionately low-income households. 96.5 million persons in the EU (Eurostat 2020) are at risk of poverty and social exclusion. Various measures exist to shelter the most vulnerable. These measures, while crucial, will be less relevant if the EU keeps a system that allows the most expensive source of electricity to set the price on the wholesale market.

The EU ETS must set a fair and transparent carbon price

Examining the drivers of the current rising energy prices in Europe leads us to question the way the EU Emissions Trading System is currently working. Allowances prices have jumped from circa 20 EUR/T CO2 in September 2018 to circa 67 EUR in late 2021 and many observers are wondering where this volatility comes from. The European Commission invited the European Securities and Market Authorities (ESMA) to investigate the drivers of the allowances price on the EU ETS. While the detailed analysis is expected in Spring 2022, a preliminary analysis was published in November 2021.

The report mentions a series of issues that hamper data collection. For instance, there are “derivatives” from emission allowances that do not lead to reporting. The report also mentions a significant number of misclassifications from entities operating on the EU carbon market registered as companies having compliance obligations (such as utilities or steel companies), when they were from the finance world.

Brexit has also created problems of data accessibility. The robustness of ESMA’s preliminary conclusions looks fragile if based on incomplete or dubious data.

The report does disclose some interesting numbers about the actors operating on the exchange platforms where emission allowances are traded. There is an obvious trend to see more financial actors trading in ETS allowances and if the involvement of the financial sector is the consequence of the growing importance of the ETS transaction and the need to manage the complexity, it raises the question what is driving price developments on the ETS?

An EU-wide cap and trade system is usually considered an efficient way to steer the decarbonisation of a series of sectors. Provided that the price signal is adequate, that measures limit the risk of carbon leakage, and auctioning revenues are earmarked to stimulate industrial innovation and limit adverse impacts, the system is widely seen as the cornerstone of the EU Climate policy, at least for power production, energy-intensive industries and part of the transport system. It is a necessary instrument to drive investments towards low-emission technologies and processes. But if price developments are significantly influenced by speculation, we have an instrument which serves the short-term greed of a limited number of traders, and not the collective interests of European citizens. This is a major issue given what is at stake: the future of our industry and workers, and the disposable income of our citizens. The EU institutions must have an open debate on the drivers of price developments on the EU ETS, based on robust and independent investigations.

European Commission Executive Vice-President, Frans Timmermans, stressed the importance of making the European Green Deal a just and social deal. Given the concerns that the Fit for 55 package lacks a Just Transition Framework, and on the potentially regressive impact of the new ETS for road transport and heating, the current price-setting mechanism on the EU wholesale electricity market, as well as the way ETS allowances are traded, must be urgently investigated.  They entail strong social impact and threaten jobs and implementing the Fit for 55 package on this basis would make the Green Deal unjust.

Luc Triangle, industriAll Europe General Secretary

Copyright © 2024 The Brussels Times. All Rights Reserved.