Letter to the European Council on energy supply and prices in Europe
Dear European Leaders,
We are writing to you to underline the determination of the electricity industry to stand by European citizens and societies in this critical situation.
The energy crisis has been triggered by conscious decisions of Russia to disrupt Europe’s energy supply. Following the restricted flow of gas into Europe we are experiencing shortages. It is critical to acknowledge that this is the root cause of the crisis, and that this should be the starting point when devising solutions.
Energy savings are critical this winter and next
An imbalance between supply and demand of energy is at the core of this crisis. Given the limited possibilities of diversifying supply in the short term, promotion of energy-savings among European citizens and businesses is a critical means to address the situation.
By reducing our energy consumption, we can stretch our existing supplies further and reduce the impact of shortages on people and the economy. Moreover, demand reductions can significantly impact price formation as seen during the economic slump of the Covid-19 pandemic, where electricity prices were exceptionally low for long periods.
Distinguish between emergency measures and structural reform
The industry understands the need to act politically on the soaring prices here and now, but it is of utmost importance that the political response provides effective solutions to the crisis at hand and at the same time avoids collateral damage on our common values and long-term objectives.
Looking at the emergency interventions, the current patchwork of national implementation measures is harming the integrated internal electricity market and undermining investments in much-needed renewable and low-carbon infrastructure. We urge leaders to pursue a coordinated implementation and avoid go-it-alone strategies that lead to further fragmentation of the internal market.
At the same time, it is of paramount importance to distinguish between emergency measures and a structural reform of the market.
Evolution of market rules – not revolution
The Internal Energy Market is reflecting the disturbances of supply, not causing them. We need to keep this in mind and keep electricity (and gas) flowing across Member States borders this winter, and in the winters to come.
The Internal Energy Market represents over two decades of joint work in the EU and this accomplishment has produced billions of Euros in benefits for European customers.
Integration between European markets guarantees security of supply across the continent, a benefit that has proven to be a stabilising factor in countries at the forefront of this current crisis.
Radical design changes in the midst of a crisis would be detrimental in the long run. Potentially for security of supply, and most definitely for investor confidence. A poorly designed reform could cause a multi-year slump at a time where investments are needed more than ever. Therefore, we suggest to make targeted additions to the current market design.
Adding improved long-term signals for customers and investors
When looking for solutions to the current situation with a suddenly induced supply shock and structural under-investment, long-term arrangements are of paramount importance for market participants, including customers.
A refined market design should aim to offer a more balanced choice of short-term and long-term price signals in retail prices. This will allow consumers to directly receive the benefits from low-cost generation sources while better managing exposure to excessive volatility such as the one we are experiencing.
It can be achieved by removing legal and administrative barriers and stimulating liquidity in the long-term markets, with products ranging from 2-4 up to 10-15 years or even longer, beyond the current time-horizon of forward markets.
An expansion in the use of long-term contracts will also provide reliable signals for developers and enable the market to attract the vast investment volumes necessary for Europe’s drive towards net-zero and energy independence.
Last, but not least, a reformed market design should be backed up by an updated and more granular framework to assess security of supply as well as the evolving needs of a changing and increasingly decentralised power system.
If carefully assessed and carried out in close consultation with industry and stakeholders, a structural reform could complement previous work and provide real solutions to key challenges for the medium and long term. An inclusive, well-considered reform can achieve real progress for Europe and the electricity industry stands ready with advice and support.