Qhat can we expect from a reform of the electricity markets? In these wholesale, European markets, all the megawatt-hours consumed at the same time are paid for at the price demanded by the generator with the highest instantaneous marginal cost – generally, gas-fired power plants. This principle of “order of merit” has ensured, until now, the adequacy of electricity supply and demand.
The war in Ukraine caused the price of gas to skyrocket, and the unexpected weakness of the French nuclear fleet greatly increased the use of gas-fired power plants. The average cost of electricity production is much lower than these marginal costs. Nuclear reactors, hydroelectric dams, wind turbines and solar panels have not seen their cost of production suddenly increase, because they pay little or no fuel.
The market reform proposals put forward by the Greek government Where by Michael Liebreich, founder of Bloomberg New Energy Financewould separate two markets: a market for low-carbon, renewable or nuclear electricity, and a market for electricity of fossil origin (gas or coal).
The two electricity markets
The first low-carbon electricity market would be based on long-term power purchase agreements between companies and distribution companies. The second, that of “fossil” electricity, would remain dominated by the order of merit, in order to avoid any blackout. Consumers would pay an average price. Thus, the current high prices of fossil electricity would no longer contaminate those of low-carbon electricity.
But this proposal would have the effect of diluting the price signal. If the price is lower than the marginal output, no consumer will adjust his demand by reducing it or shifting it over time, to the “efficient” level, i.e. when the cost borne is equal to that of the marginal kWh.
Similarly, the incentive given to producers to produce more at times of shortage would disappear, an incentive that the “additional remuneration” mechanism has preserved for renewable energies: each producer receives or pays the difference between the average selling price received during of the previous month by all the operators and the price agreed by contract, which guarantees him “reasonable remuneration”.
The benefits of the reform
With such a reform, building more efficient wind or solar farms (more photovoltaic panels, longer wind turbine blades, or producing more in the evening and less at noon, for example) would no longer be of interest. Nor is the development of storage. Unless, of course, you design fully modulated contracts according to the hours and days of the year, and over twenty years!
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