Does Europe’s energy market design need reforming?

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As Europe’s electricity prices soar, the European Commission is considering whether the energy market design is fit for purpose. Governments are weighing market interventions such as price caps and decoupling wholesale power and gas prices.

Pamela Largue recently had a candid conversation with Prof. Dr Stefan Ulreich, Internationalization Officer at the Biberach University of Applied Sciences, about whether these market instruments are really needed and what the potential impact could be on energy bills and renewables investments.

Is the EU market fit for purpose?

Prof. Ulreich answered this question without mincing words: “From my perspective, the market works perfectly.”

The problem, stated Ulreich, lies with the scarcity of gas due to Russian curtailment leading to higher prices and the fact that Russia, as a supplier, can’t be swiftly replaced.

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“The market works, you may like it or not, but you have to accept the high prices as a consequence of this situation.”

According to Ulreich, it’s important to understand why Europe is in this situation. He explained that over recent decades the continent has reduced the variety of fuels in the energy mix, relied on fewer types of technologies to produce the fuels and has sourced fuel from fewer countries.

“Even though in some cases this reduced emissions, it resulted in some technologies not being maximised such as CCS (carbon capture and storage) and nuclear.”

Lessons from the current situation

The first lesson, according to Ulreich is “if you’re not willing to pay insurance premiums in times of high supply, you will have security of supply issues in times of scarcity.”

The second lesson is this: “If you are very picky with the technologies you include, you might end up in a mess,” referencing the use of nuclear and carbon capture and sequestration, or the lack thereof.

“We need to use everything. Claiming that the market is not fit is misleading.”

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“Changes to the current market design, therefore, become a remedy for the effect but do not tackle the cause. These changes would only make limited sense.”

The way forward

Ulreich emphasisied that the market mechanism changes being investigated will not offer an economically sustainable solution.

What is needed is to relook at the energy policy framework, ensuring a stable framework to encourage investors. “Introducing new taxes does not present a stable picture and could discourage investors,” added Ulreich.

Ulreich recommended a more balanced energy policy that focuses equally on all aspects of the energy trilemma. “In the past environment was dominating but led to almost zero awareness in terms of affordability and security of supply.”

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“Some market design changes are necessary but for different reasons. We need a future-proof design that ensures flexibility, security and that will answer the upcoming seasonal demand.”

Ulreich explained the importance of hydrogen infrastructure and storage in coping with seasonal demand, however, progress can not be achieved without political and regulatory guidance.

Listen to the podcast recording for more insights from Prof. Ulreich.

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