Clear as mud
Why exactly is the EU so reticent about redesigning its failed energy markets?
The long-awaited final report from ACER, the EU’s Agency for the Cooperation of Energy Regulators, on the adequacy of EU wholesale electricity design landed late last week. Readers will recall that ACER was tasked with reviewing EU energy market arrangements last October in response to spiralling gas and power prices. In a nutshell, the regulator has concluded there’s nothing to see here and asked everyone staring at the remains of Europe’s war-bludgeoned liberalised energy markets to kindly move along.
The European Commission asked ACER, inter alia, to look into whether the EU’s system for setting wholesale power prices exacerbated volatility. Member states have been clamouring for a review since last summer’s spectacular post-Covid global gas rally pushed prices to record highs. EU wholesale energy prices went stratospheric in tandem, and stayed there.
At the time of writing, the month-ahead price of gas on the benchmark Dutch TTF hub is €106 per MWh. German baseload power futures are trading at €200 per MWh, and the forward curve is comfortably above that symbolic threshold out until April 2023. While prompt prices have cooled off somewhat since the post-invasion lunacy of late February and early March, German electricity is still up almost 400% in six months and showing no signs of softening. Something is very wrong here.
Before going any further, it is worth acknowledging that a fundamental tightening of global commodity markets inflated prices across the board. Liberalised energy markets all over the world are bleeding, regardless of their overarching design. Runaway demand and supply constraints pushed up fuel costs, which in turn pushed up power prices. It’s Economics 101.
But does that exonerate systemic failings? A closer look at the crux of the issue — the EU’s preferred mechanism for electricity price discovery — reveals shortcomings that have been apparent and well-documented for decades. That being so, are there ulterior motives that might explain dogmatic faith in the EU’s liberalised energy market design, even when its failings are plain for all to see?