Filenews 29 December 2024
Reforming the energy market in such a way that the price of cheap renewable energy is no longer dictated by the cost of more expensive fossil fuels is proposed by the famous Draghi report, which devotes an extensive piece to the sector.
The tense geopolitical climate and recent geopolitical developments, including Russia's invasion of Ukraine, have reshaped Europe's energy landscape, testing member states' resilience while creating new opportunities. Europe has the opportunity to lead the clean energy transition while maintaining the competitiveness of its industry.
The main proposals of the report for the energy sector are as follows:
The decarbonisation of the economy and the clean energy transition should be accelerated. And the benefit of cleaner energy should be visible to all consumers. That is, consumers to pay cost-oriented prices for electricity from RES.
In gas supply, the report proposes that, in addition to diversifying suppliers, emphasis should be placed on the most reliable and with the best prices. Also, procurement should take place at EU level and not at national level or at the level of small groups of countries.
On electricity, it proposes strengthening European networks and simplifying permitting procedures for renewables. At this point, he cites Greece as a negative example, since RES licensing reaches 8 years, compared to the EU average of 2-3. to reduce dependence on natural gas.
As a horizontal measure, Mario Draghi proposes to reduce taxes on energy and reorganise the EU's control and supply system.
High energy prices
The Draghi report deals in detail with the high energy prices observed in Europe. The root cause of high energy prices lies in structural factors, which can worsen.
The energy gap with the US is mainly due to Europe's lack of natural resources and limited collective bargaining power, even though Europe is the world's largest buyer of natural gas. At the same time, the gap also arises from fundamental issues in the EU energy market, such as slow and suboptimal investment in infrastructure. for both renewable energy and grids. Market rules prevent industries and households from reaping the full benefits of clean energy in their bills, while derivatives lead to greater price volatility.
The EU, although the world's largest importer of gas and LNG, is not making sufficient use of its potential collective bargaining power, relying too heavily on spot prices, which exposes it to greater price volatility. During the 2022 energy crisis, competition between EU countries for the gas market contributed to unnecessary price increases. In response, the EU introduced a coordination mechanism (AggregateEU) to aggregate and match demand with competitive supplier offers, although there is no obligation for joint purchases through the platform.
The fall in gas prices from the high levels of the crisis does not eliminate market volatility, especially when there is an increase in dependence on LNG. In 2023, 42% of EU gas imports were LNG, compared to 20% in 2021, when LNG prices are generally higher than pipeline gas due to liquefaction and transportation costs. Overall, these structural challenges require enhanced supervision and a possible revision of the rules governing companies participating in energy derivatives markets.
European energy market rules transfer this volatility to end-users and may prevent the full benefits of decarbonising electricity generation from being delivered. Despite investments in clean energy sources and reduced dependence on natural gas, market rules do not fully decouple the price of renewable and nuclear energy from more volatile fossil fuel prices. This prevents end-users from benefiting from lower clean energy costs in their bills.
In 2022, at the height of the energy crisis, gas was the price determinant in 63% of cases, despite accounting for only 20% of the EU's energy mix.
Long-term contracts, such as Power Purchase Agreements (PPAs) or Contracts for Difference (CfDs), can help reduce energy costs for end users. However, these solutions are poorly developed in Europe, limiting the benefits of renewables.
Without immediate action, the problem is expected to remain acute until the end of this decade. Even if the targets for installing new renewables are met, no significant reduction in the hours during which fossil fuels will set energy prices by 2030 is foreseen.
The effect of taxation
Energy taxation has become an important source of government revenue, contributing to higher retail energy prices. Although taxation can be used as a policy tool for decarbonisation, there is wide variation between member states on taxation.
Unlike the EU, the US does not impose federal taxes on electricity or gas consumption. In addition, electricity generation in the EU is subject to the European Emissions Trading System (ETS), which leads to the pricing of carbon emissions that add to production costs. These costs are high and unstable in the EU and range for gas plants between €20 and €25 per MWh, while in California the corresponding costs are around €10-15 per MWh.
Excluding CO2 costs paid by producers, energy production costs amount to 45% of retail prices for households and 65% of prices for industry. The remaining costs are shared equally between distribution networks and taxation, which weighs on final retail prices.
State of play today – Costs hit growth in the EU
Draghi's report reviews the current situation in Europe's energy market, noting that high energy costs in Europe are an obstacle to growth, while a lack of capacity on grids could hamper the spread of digital technology and the electrification of transport.
European Commission estimates show that high energy prices in recent years have hurt growth in Europe. Energy prices continue to affect firms' investment sentiment much more than in other major economies. About half of European companies see energy costs as a major barrier to investment – 30 percentage points higher than US companies.
Energy-intensive industries have been hardest hit: production has fallen by 10%-15% since 2021 and the composition of European industry is changing, with an increase in imports from countries with lower energy costs. Energy prices have also become more volatile, increasing hedging costs and adding uncertainty to investment decisions. Without a significant increase in capacity and grid capacity, Europe may face constraints in the digitalisation of production, as the AI sector and data centres are particularly energy intensive.
Forbes Greece – From the latest issue of Forbes Cyprus
