The EU’s energy plan for a difficult winter: What are the options? by Elisabetta Cornago, 9 September 2022 The European Commission’s new plan aims to cut electricity use to reduce prices and possible blackouts; to extract some of the windfall profits of energy companies; and to curb Russia’s gas revenues. EU electricity and gas prices have reached new highs in the last few weeks. Pipeline gas imports from Russia are lower than ever, as Gazprom has again halted gas flows through the Nord Stream 1 pipeline, which may not reopen. The European electricity market is also under stress: half of France’s nuclear capacity is offline due to unforeseen maintenance and heatwaves complicating cooling, while droughts have cut hydropower generation. Record-shattering energy prices are driving EU governments to consider new Union-wide measures to curb prices at the emergency meeting of EU energy ministers on September 9th. European Commission President Ursula von der Leyen stated on August 29th that the Commission was considering both shortterm emergency policies to help consumers, and long-term structural reforms of electricity markets. This marked a change in the position of the Commission, which had previously strongly opposed calls for revising electricity market design. But structural reform will take time, so for now the focus is on emergency interventions: this insight analyses the proposals that President von der Leyen announced on September 7th, building on details contained in leaked documents. The reason why electricity prices have been rising following the rise in gas prices is because of the way electricity markets function. Market demand is filled firstly by the cheapest power generation, with more expensive generation options joining in until all demand has been filled. Wholesale electricity prices are driven by marginal pricing, meaning that the price of the most expensive power generation, which produces the last megawatt of electricity needed to fully meet demand, determines the price for all electricity generation. Currently the most expensive technology is gas-fired power plants, and they are frequently called upon when there are peaks in demand, since they can scale their generation up and down quickly unlike many other generation options. As their price bid is the highest, gas-fired plants set the wholesale price even though a large chunk of electricity is generated with cheaper technologies like wind, solar, hydropower and nuclear power plants. CER INSIGHT: The EU’s energy plan for a difficult winter: [subtitle] What are the options? 9 September 2022
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