Energy

EU Energy prices

In the EU, each EU country can decide its own energy mix, but it has to follow the rules of the internal EU energy market and take into consideration the EU’s climate ambitions. The primary objective of a well-functioning market is to foster a secure supply of energy, produced as sustainably as possible, at affordable prices. The EU energy sector responds to market forces so that energy companies strive to be as competitive as possible.

Energy prices 2021

In the course of 2021, there was a notable increase in EU wholesale energy prices. There were a number of causes, but the prime driver was clearly the rise in the gas price worldwide – a result of the surge in global demand, notably in Asia, as most countries emerge from the Covid-19 pandemic. This led, for example, to lower volumes of liquefied natural gas imports into Europe. At the same stage, a combination of lower supplies of gas, a longer heating season in 2020-21 and unfavourable weather conditions for producing renewable energy (less sun, less wind) created an unusual undersupply. To a lesser extent, an increased carbon price under the Emissions Trading System (ETS) also contributed to the adverse market situation.

Commission toolbox of measures

In response to the spike in wholesale prices, the Commission and EU countries expressed concerns about how this might be passed on to end-users, in particular to the most vulnerable consumers. In order to clarify what measures are possible under existing EU rules, the Commission published a Communication on 13 October 2021.

This “toolbox” documents a range of short- and medium term initiatives that EU countries can take under the existing legislative framework, and other potential responses within the Commission’s field of responsibilities. See also the press release from the same date and its 2 factsheets on EU energy market and energy prices and the toolbox for action and support.    

Energy pricing models

As in other sectors, the EU electricity market  has a number of different players in the supply chain – from producers (or generators), to suppliers to end-consumers - with wholesale prices at one end and end-user prices at the other.

The wholesale market in the EU follows a system of marginal pricing, also known as pay-as-clear market, meaning that everybody gets the same price for the electricity they are producing at that moment. Electricity producers (from national utilities to individuals who generate their own renewable energy and sell into the grid) bid into the market: they establish their price according to their production cost. Renewable energy sources are produced at zero cost, and are therefore by definition always cheapest. The bidding goes from the cheapest to most expensive. The cheapest electricity is bought first, next offers in line follow. Once the full demand is satisfied, everybody obtains the price of the last producer from which electricity was bought.

This model provides efficiency, transparency and incentives to keep costs as low as possible. There is general consensus that the marginal model is the most efficient for liberalised electricity markets. In fact, it was the model used by most EU countries before being set in EU legislation and most electricity markets worldwide are based on this mechanism.

The alternative would not provide cheaper prices. In the pay-as-bid model, producers (including cheap renewables) would simply bid at the price they expect the market to clear, not at zero or at their generation costs.

Overall, it is better for consumers to have a transparent model that reveals the true costs of energy and provides incentives for individuals to become active in generating their own electricity (sometimes called “prosumers”).  

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