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Review

The worsening energy crisis besieging Europe has laid bare the “limitations” of the electricity market and requires an “emergency intervention” to bring down soaring prices, Ursula von der Leyen has said.

“The skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design,” the European Commission president said on Monday while addressing the Bled Strategic Forum in Slovenia.

Interesting how it is suggested that the energy markets themselves are to blame, rather than the European Commission. If only we knew the “different reasons”… As we will see later in this article, this is somewhat their own doing.

"[The market] was developed under completely different circumstances and for completely different purposes. It is no longer fit for purpose.

Yes it was, and some people saw this dependency on Russian energy as an extremely poor move. As I wrote previously, former US President Trump warned about Germany’s energy dependency on Russia. This went completely unheard in 2018, as the German representatives laughed at him. I bet they are not laughing now.

“That is why we, the Commission, are now working on an emergency intervention and a structural reform of the electricity market. We need a new market model for electricity that really functions and brings us back into balance.”

I have zero faith they are capable of doing this. As the article goes on, we will see how they make poor assumptions to begin with and are likely to make a similarly crappy system.

How does the electricity market work?

Today, the EU’s wholesale electricity market works on the basis of marginal pricing, also known as the “pay-as-clear market”.

Under this system, all electricity producers – from fossil fuels to wind and solar – bid into the market and offer power according to their production costs. The bidding starts from the cheapest resources – the renewables – and finishes with the most expensive ones, usually gas.

Since most EU countries still rely on fossil fuels to meet all their energy demands, the final price of electricity is often set by the price of gas. If gas becomes more expensive, electricity bills inevitably go up, even if clean, cheaper sources also contribute to the total energy supply.

In theory, with all of that money the renewable energy companies were saving by delivering cheap energy, they should have been able to make tonnes on reinvestment back into their infrastructure, and wouldn’t have had to rely on subsidies at all…

Of course this is completely false. Renewable energy is heavily subsidized at multiple levels as an incentive to renew carbon emissions, paid for by non-clean fuels, such as fossil fuels and gas. If you stop using carbon heavy fuels, where does green energy get their subsidies from?

This is completely ignoring other factors, which we will discuss shortly.

The system was initially praised for boosting transparency and promoting the switch to green sources, but since late 2021, it has come under intense criticism.

Classic. Everybody clapped, until they saw the results of their actions. Former President Trump, who is said to be the biggest idiot on the face of the planet, correctly predicted this would make the EU energy dependant on Russia.

Russia’s invasion of Ukraine has brought the market design to its most extreme limits, fuelling calls for state intervention and meaningful reforms.

No, Russia invading Ukraine had nothing to do with it. Russia could have pulled this stunt any time they liked. They could have slowly increased the price of gas artificially to increase profit, whilst bleeding the EU energy market. They could have completely turned off the gas supply entirely and invaded any European Country over night.

The point is, it was happen chance that it was a Ukrainian invasion.

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

Why not every Country? Surely this would be unanimous? What isn’t being said here? Who is currently happy with the current status quo? It appears only Western European Countries are unhappy, so why are Eastern European Countries not complaining?

The Czech presidency of the EU Council has already convened an extraordinary meeting of energy ministers, scheduled to take place on 9 September.

Good luck - you’re stuck between a rock and a hard place here.

Soaring gas prices

President von der Leyen did not unveil further details in her speech, which touched upon a wider range of topics, including rule of law, climate change, the economic recovery and EU enlargement.

Probably because anyone worth their salt knows there is no quick fix. The energy industry moves at an incredibly slow pace, it’s not easy to make changes here. You cannot just flip a switch and build 5 new power plants and a farm of sea turbines.

Her comments come amid a record-breaking spike in gas prices, driven by speculation around Gazprom, Russia’s state-controlled energy giant.

It’s great and all you suggesting this, but the German side of Gazprom was likely completely left in the dark regarding Russia’s intentions. From Russia’s perspective, why tell more people of your plans? They likely just fed Gazprom reduced gas several times and forced them to deplete their reserves. This is likely common practice, hence the gas storage existing in the first place.

The multinational has repeatedly limited and even shut down gas flows to several EU countries. Deliveries across the Nord Stream 1 pipeline are at 20% of its daily capacity.

There is simply not enough gas for the demand, of course this has happened. They cannot magic it from nowhere. It likely has been prioritized to the highest bidder.

On Friday, future gas prices at the Title Transfer Facility (TTF), the continent’s leading trading hub, reached €339 per megawatt-hour, a stratospheric figure compared to the €27 mark set a year ago.

The seemingly unstoppable upward trend is raising fears of bankruptcy for companies and energy poverty for households ahead of the winter season, when heating consumption is expected to increase drastically.

No shit. Wait till people learn about how much energy is required for food production. I’m already starting to see the shelves thinning out of certain products.

In late July, the EU decided to establish a voluntary plan to reduce gas demand by 15% between now and next spring with the hopes of somehow cushioning the impact of the Kremlin’s energy manipulation.

The price of gas will do this alone. Nobody is happy with this increase. Even for European gas companies, this means chasing up debt and cutting off customers, all of which they will likely lose for life. Then there is the switch away from gas supplied from Russia entirely. This has been a disaster.

Discussion

EC President Ursula von der Leyen is doing everything in her power to reflect blame away from herself, but this is precisely what the EC is supposed to be capable of predicting and managing. They had zero contingency in place and slept walked into this problem, even making it worse by pegging the price of energy on Russian gas.

Equally, the UK should have saw energy security as a massive issue too. Why on earth we buy energy from the EU is beyond me, especially as the conditions that lead us to have a shortfall also likely affect our neighbours. Duh.

The real answer that nobody wants to talk about here is nuclear power. It’s green (after offsetting the initial carbon emissions from production), it’s safe (technology is exceptionally good now) and it’s cheap. Instead of wasting money on solar panels in a Country where the sun doesn’t shine, and wind where there’s either too much or too little, we should rely on ultra reliable nuclear power.

Sure, in the course of thousands of years this is not sustainable, but it solves the problem long enough that we can work on long-shot ideas such as nuclear fusion as carbon levels in the atmosphere are reduced.

Finally, I leave some simple but meaningful questions:

1. How is your shift towards electric vehicles going to work without a green electrical grid, an infrastructure that can sustain it, the raw materials to build it or the energy security to supply it ¹?
2. Why are you not building more nuclear power plants? The energy is cheap, the plants are a great long-term investment, they are safe and we have systems in place for dealing with nuclear fuel. After recycling the fuel and refining the waste product, we could drill a hole in an ultra geo-stable area and bury it in rock that won’t resurface for millions of years. There are already mountains filled with it for example.
3. What is being done to secure food chains? How are farmers expected to produce affordable food when fuel prices are so high, fertilizer is ultra expensive, most pesticides are banned, the summer of droughts we just had and the government converting every piece of greenbelt in site into affordable housing. Where exactly do you think this ends?

Anyway, let’s see how this one plays out.