Unprecedented electricity prices push the EU to “urgently intervene”

The standard European gas price has risen 550% in past 12 months
Unprecedented electricity prices push the EU to “urgently intervene”
The deepening energy crisis has exposed the limitations of the electricity market

The European Union (EU) intends to take quick measures to stop the growth of car prices and to carry out a long-term reform of this market at the start of next year.

Prices in the European electricity market are determined by gas-powered factories. Due to the strong rise in gas prices against the background of the Russian-Ukrainian war, the price of electricity has increased significantly.

It was natural for the unprecedented increase in electricity prices to raise inflation rates, as energy  constitutes an important factor of the inflation component, and exacerbates the economic burden on companies and families that were beginning to recover from the effects of the Coronavirus.

According to European Commission President Ursula von der Leyen, the deepening energy crisis engulfing Europe has exposed the “limitations” of the electricity market and required an “emergency intervention” to bring down high prices.

“The market has been developed under completely different conditions and for completely different purposes. It is no longer relevant. That is why we, in the Commission, are now working on an emergency intervention and structural reforms of the electricity market. We need a new market model for electricity that really works and brings us back into balance.

Today The EU wholesale electricity market operates on the basis of marginal pricing, also known as the pay-as-you-go market,” von der Leyen, who chairs the EU’s executive body, said in a speech at the Bled Strategic Summit in Slovenia.

Under the current system, all electricity producers – from fossil fuels to wind and solar energy – bid on the market and provide energy according to their production costs. supply starts with the cheapest resource – renewables – and ends with the most expensive resource – usually gas.

Since most EU countries still depend on fossil fuels for all their energy needs, the final price of electricity is often determined by the price of gas. And if gas becomes more expensive, electricity bills will inevitably rise, even if cleaner and cheaper sources also contribute to the overall energy supply.

The system was initially praised for promoting transparency and encouraging a shift to green sourcing, but since late 2021 it has been heavily criticized.

The Russo-Ukrainian war pushed the current market architecture to its limits, prompting calls for state intervention and meaningful reforms.

Spain, Portugal, Greece, France, Italy, and Belgium were among those calling for a “decoupling” of gas and electricity prices to end the impact of the contagion.

The Czech presidency of the Council of the European Union decided to hold an extraordinary meeting of energy ministers for this purpose, on the ninth of September.

On Sunday, Austrian Chancellor Karl Nahammer called on the European Union to “separate the price of electricity from the price of gas” to stop the price frenzy. He said that this chapter will be on the list of September 9 talks. On the same day, Belgian Energy Minister Tine van der Straiten called for market reform, which he described as a “failure” and “is no longer suitable to meet the needs of many consumers and families.”

This scenario has also been demanded by France, which believes that French consumers do not benefit from lower nuclear energy costs because of an “obsolete” mechanism.

Von der Leyen’s comments come amid record gas prices, driven by speculation about Gazprom, the Russian state-controlled energy giant.

The multinational supplier has repeatedly restricted or even stopped, the flow of gas to several EU countries. Deliveries via Nord Stream 1 have reached 20 percent of its daily capacity.

The energy cost surge is raising fears of business bankruptcy and household poverty ahead of the winter season, as heating consumption is expected to increase dramatically.

The data shows that with rising wholesale gas and electricity prices, millions of people in Europe are now spending a record amount of their income on energy.

The benchmark European gas price has risen by 550 percent in the past 12 months. On Friday, future gas prices reached 339 euros per megawatt-hour, an exceptional figure compared to 27 euros set a year ago.

Ofgem said the cost of energy for British consumers will rise by 80 percent from October, bringing average annual household bills to 3,549 pounds ($4,188).

In late July, the EU decided to put in place a voluntary plan to cut gas demand by 15 percent between now and next spring, hoping to somehow mitigate the impact of the Kremlin’s energy manipulation.

In the same context, European oil giant Shell Plc warned that Europe may have to prepare for a series of winter seasons with exorbitant energy bills and electricity rationing as Russia reduces gas supplies.

The company’s CEO, Ben van Beurden, called for the need to face reality, and said, “I think that the end of the crisis is just a fantasy that we must put aside.”