State of the European Union speech: the good, the bad and the ugly

On Wednesday, European Commission President Ursula von der Leyen addressed the European Parliament with the annual State of the European Union (SOTEU). Among points on the war in Ukraine, protecting democracy, and even the late Queen’s passing, the biggest component by far was the Commission’s proposals on addressing the energy crisis. It was undoubtedly a strong and inspired political speech. But several elements were less than encouraging. 

Something had to be done

The unprecedented energy circumstances necessitated a response. Indeed, during her speech, President von der Leyen insisted on this. But will the proposals do what needs to be done to stave off the worst that’s yet to come?

 “The situation is unprecedented so our proposals to tackle it should also be unprecedented”. ~ Ursula von der Leyen, European Commission President

The proposals no doubt have significance for the power sector. They range from a windfall tax on profits from non-gas power generators to a “solidarity contribution” from fossil fuel generators - from electricity consumption reduction plans to an easing of collateral requirements on futures for wholesale electricity. They also included mention of a European Critical Raw Materials Act and, most dramatically, the announcement that the prevailing merit order approach to the European electricity market “is not for purpose” and that “deep and comprehensive” reform is in order. However, details of such reform are to come later on.

“The current electricity market design – based on merit order – is not doing justice to consumers anymore. We have to decouple the dominant influence of gas on the price of electricity” and start on a “deep and comprehensive” reform.” ~ Ursula von der Leyen, European Commission President

Eurelectric response

In short words, we see Wednesday’s address as being positive on hydrogen, raw materials, energy saving and liquidity. The Commission has proposed concrete, workable solutions. But the speech left big question marks on structural market reform and the poorly designed emergency intervention proposal.

 Our Secretary-General, Kristian Ruby , put it best in his remarks following the speech:

“It is positive that the European Commission has tabled proposals to reduce electricity consumption this winter. It will be necessary given the difficult situation.

We also welcome the efforts to address the strategic raw materials challenge as well as the more immediate liquidity issues that many utilities are experiencing. Changing the rules for collaterals will be necessary to make the forward markets more liquid. This in turn will help rebalance prices.

The electricity industry recognises the need to address the soaring energy bills, but the approach of the European Commission is tackling the consequences of the crisis, not the cause.

A task force to explore how to tackle gas prices is simply insufficient in the current situation. At the same time, the measures proposed to cap revenues for renewable and low-carbon electricity producers risk damaging investor confidence."

The cause of this crisis, as shown in our launch of Power Barometer 2022 last week, is Europe’s reliance on imported fossil fuels and the exceptionally high gas prices we are witnessing at present. These gas prices are having major contagion effects on electricity markets. Without addressing the link between the astronomical cost of provisioning gas and the wholesale electricity price, the problem remains unsolved.

Coming up

The SOTEU is hardly the end of this matter. The political ambition to proceed with a fundamental shift in electricity market functioning remains worrisome, especially considering the €80bn year-on-year investment we need to carry out the energy transition. Investor confidence will be key to realising this, but such interventions now open the door to longer-term intervention should the crisis continue to prevail next winter.

The proposals now face scrutiny from the Parliament and Council, in addition to a spotlight at the second extraordinary energy council scheduled for 30 September. The sector and all its stakeholders will be watching the developments closely, hoping for a swift resolution to the heart of the problem.