If cattle marts worked like energy markets, we’d say it was a load of bull

“This market is not functioning anymore.” That was the stark declaration of European Commission president Ursula von der Leyen about Europe’s energy markets at her annual State of the Union address to the European Parliament.

“The current electricity market design — based on merit order — is not doing justice to consumers anymore. They should reap the benefits of low-cost renewables,” she continued.

“So, we have to decouple the dominant influence of gas on the price of electricity. This is why we will do a deep and comprehensive reform of the electricity market.”

These words raise the hopes of those who have long argued that the way that electricity is priced in Europe is, to be polite, dysfunctional.

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Imagine we’re at a “country mart”, an EU official who is critical of the system wrote to me, describing a scene familiar to towns Ireland of cattle being sold at auction.

“Harassed farmers and dealers shout back and forth all day,” they wrote. “Yews are ‘sold’ for €220, decent suckler calves for €1,000. All seems well, but then a huge breeding bull comes into the ring. He’s bought for €20,000 — which then becomes THE FINAL PRICE FOR EVERY ANIMAL SOLD.

“There would be murder.”

But this is the reality of electricity markets, the official explained. Instead of the yews and suckler calves, it’s renewable energy at €40 per megawatt hour, nuclear and hydro at about €60, and the great breeding bull of gas lumbering in at €600 to €700.

Yet despite gas being the least-used component in the energy mix, below 10 per cent in most member states, it fixes the price for all electricity. Hence all of our hefty, four-digit electricity bills.

“It will be argued by the indolent and stupid that this is all too difficult to fix. It is not,” the official continued.

“The famous ‘markets’ are no more than software platforms and the ‘fix’ consists of 20 lines of code to implement ‘basket’ pricing instead of the now inappropriate ‘marginal’ rules. Consumers bills would drop across the continent by at least three quarters.”

Ideas for market redesign were not part of the European Commission’s proposals to bring down energy bills this week.

Instead, this matter has been referred for further study, with proposals scheduled to be unveiled in early 2023.

“It takes a bit of time, because it’s a very intricate market with a lot of players,” European Commission vice president and chief of the green transition Frans Timmermans told me when I asked him about it.

“The energy market electricity market is very intricate. I think we need to be very cautious and very precise, and also make sure we involve all the stakeholders in preparing the redrafting of the electricity markets.”

This will require a “profound impact assessment”, Mr Timmermans said. “But our citizens can’t wait that long, so we need to make sure we do something else. This is an emergency situation.”

The energy proposals announced by Dr von der Leyen at the State of the Union amount to this emergency fix.

The plans involve leaving the pricing system of the market as it is for now. But for any energy bought on the market, producers of renewable and nuclear energy would be able to take home a maximum of €180 per megawatt hour. The rest would go to the government. Fossil fuel energy producers would be levied for a 33 per cent contribution of their excess profits earned this year. This pot of money would then be redistributed to those the government deems to be in need.

So the electricity markets will not be reformed this winter. But Dr von der Leyen’s speech left open the possibility of radical change.

In the fossil fuel crisis of the 1970s, leaders made a mistake, she said.

“We did not get rid of our dependency on oil. And worse, fossil fuels were even massively subsidised. This was wrong, not just for the climate, but also for our public finances, and our independence. And we are still paying for this today.”

At the time, “only a few visionaries understood that the real problem was fossil fuels themselves, not just their price,” she continued.

Among them were the Danish. “When the oil crisis hit, Denmark started to invest heavily into harnessing the power of the wind.” Wind energy became a major local employer, and Denmark a leader in the industry.

This is the kind of approach needed, she argued. “Not just a quick fix, but a change of paradigm, a leap into the future.”