The Positives: all eyes on grids and a market-friendly approach to boosting competition
For the first time, there is a clear call to common funding for electricity grids – at both transmission and distribution levels – as an essential pre-requisite for achieving EU energy and decarbonisation objectives.
“It is positive to see that the need for reinforced and expanded power infrastructure is now front and centre, together with the development of storage and flexibility solutions.”
The report provides a very clear picture of the state of our power infrastructure and includes the need to address supply chain shortages for raw materials and grid components, to allow higher interconnection capacity and to bring low-voltage distribution grids under the spotlight on a par with transmission grids.
Contrary to what was rumoured in previous weeks, the report does not advocate for radical change of recently agreed market reforms. “Super Mario” remains a strong supporter of Europe’s internal energy market and its marginal pricing, which has kept efficient price signals that prioritise the dispatch of the most competitive energy sources. The report confirms this system has reduced price variation across EU countries and delivered around € 34 billion in cost savings each year to both household and businesses.
“Draghi’s report highlights the importance of long-term instruments such as PPAs and CfDs to better transfer the benefits of cheap renewable and clean energy to consumers and to make our energy prices more competitive. To see PPAs volumes rise to the necessary levels, however, all EU member states must urgently implement the agreed electricity market reform.”
PPAs are not picking up in the same fashion in Europe as most buyers are coming from the IT sector rather than energy intensives – confirms the report. Incentivising their use can help consumers hedge against excessive price volatility.
However, some aspects of the report are not “market-friendly” and could undermine investor confidence.
The Less Positives: market interventions and questionable ETS fixes
To begin, the report proposes several untested ideas for reducing energy costs that could use more careful consideration. For instance, the report suggests granting temporary electricity price reliefs for energy intensives. While this may appear beneficial at first, it might do more harm than good. A regulated price on clean electricity would destroy any investment signals for clean power investors.
Increased demand and investor confidence are key elements for ensuring sustained investment in infrastructure and clean electricity generation. We must therefore find the right balance in boosting our competitiveness while also preserving the correct functioning of the market.
Of particular concern for the industry, is the requirement to “supply a predefined minor share of their publicly subsidised production through PPAs at ‘production cost plus mark-up’ to specific industries exposed to international competition.” This would reduce incentives for generators to enter long-term contracts and discourage investment into clean power generation.
“It is essential to take a systemic perspective when considering the introduction of predefined shares of publicly subsidised production for specific industries. This approach represents a significant market intervention that risks discouraging investment in the electricity sector. At a time when we are competing with other sectors to attract capital, we believe this is not the right approach.” – adds Ruby.
Better forms of offering discounts for energy intensives would include lowering energy prices by properly taxing electricity vis-a’-vis polluting fossil fuels as well as ensuring proper remuneration for industrial demand-side response, an argument shared by Draghi himself in the report. Today, electricity is taxed 1.4 times more than gas. Correcting this imbalance would level the playing field with the gas market and thus incentivise the switch to electric decarbonised energy sources. Therefore, speeding up electrification is key for keeping prices in check.
Draghi’s positions on ETS have also raised a few eyebrows within the power sector, especially with regards to the call for more support for hydrogen and CCUS within the ETS scheme. Eurelectric recognises the ETS revenues allocated so far are insufficient for covered sectors to decarbonise at the necessary speed. However, the spending of ETS revenues should be adjusted to current national realities rather than standardised for every country, as every member state has its own specific industrial layer and needs, ETS funds should be allocated based on their necessities and priorities in achieving the energy transition. At the same time, we should refrain from any delays in the phase out of free allowances, as it would continue to heavily distort a well-functioning carbon market.
While energy is a key factor in making our industrial base competitive, it’s only one part of the equation. The report seems to isolate high energy prices as the sole reason behind the lack of competitiveness of our energy intensives,but we know reality is far more complex.
Moving forward
Overall, Eurelectric welcomed the Draghi report given its close alignment with the sector’s “4I” policy priorities for the new Commission:
- Implementation: adopting long-term contracts in the electricity market reform, solving permitting bottlenecks, and finalising the revision of the European Taxation Directive.
- Investments: boost financing of network upgrades, clean and renewable capacity and harmonising grid tariffs
- Infrastructure: deploying storage & flexibility solutions while improving distribution networks.
- Industrial electrification: reducing energy cost through PPAs long-term contracts as well as by promoting self-generation.
Draghi’s report will be instrumental for Ursula von der Leyen’s second term, giving key recommendations on which direction to steer the EU. It could not have come sooner. Von der Leyen is set to name the basket of Commissioner nominees to various portfolios up for grabs on Wednesday. This report will help her wrap her head around what those Commissioners should be prioritising.