Against the backdrop of the war in Ukraine and soaring energy prices, the European electricity market has become the target of criticism from several presidential candidates. “Electricity tariffs are increasing because Europe has pegged French tariffs to other countries”, denounced Eric Zemmour on CNews on March 2. A week later, Valérie Pécresse proposed on BFMTV to “exceptionally disconnect by decree the price of electricity in France from the price of the European market which is indexed to gas”. “I don’t want electricity, which is indexed to the price of gas, to increase by as much”, also dropped Marine Le Pen in the program “Face à la guerre” on TF1, five days later. How does this European market work? Does it really index the price of electricity to that of gas? Is it possible to reform it or get out of it to reduce the bill for French households?
The European electricity market was set up in the 1990s, when the energy sector was liberalized and opened up to competition, recalls the European Parliament. Like all single markets, this one has a clear objective: to align prices for all member countries and create a common wholesale price regardless of national production costs. Consequence: even if French producers produce electricity at low cost, they sell it at the European market price.
“French, Romanian and Greek consumers have access to electricity whose prices are formed equally.”
Anna Creti, professor of economics at Paris-Dauphine Universityat franceinfo
The price of electricity is set according to the cost of the last energy source used, explain the experts interviewed by franceinfo. To meet demand, production sources are used in increasing order of cost: first renewable energies (solar and wind power), then hydraulics, nuclear power and, in the event of high demand, power stations. gas. When demand is strong, in winter for example, the equilibrium price in Europe is therefore based on the operating cost of gas-fired power stations, which are the most expensive.
This logic aims to allow the last means of production used to return to its operating costs. “If we cap the equilibrium price at 70, someone who has a gas plant that costs 100 will refuse to make his production available to the market when he is paid 70. However, we need these gas plants, since electricity cannot be stored. As a result, everyone is paid the same price”argues Jacques Percebois, Emeritus Professor of Economics at the University of Montpellier.
Problem: the price of gas has exploded in recent months, due in particular to the increase in demand with the post-Covid-19 economic recovery. The war in Ukraine has pushed it up even further. The reference price of European gas, the Dutch TTF, reached a record on March 7 at 345 euros per megawatt hour. It remains very high and carries in its wake that of electricity. This even reached, according to figures provided by RTE, 700 euros per megawatt hour a week ago, whereas it had never exceeded 100 euros in the same period a year ago.
If this wholesale price does not quite correspond to the retail price (the one paid by the consumer), which also takes into account the cost of transport and taxes, it is however decisive in its formation: it weighs about a third . Thus, without the measures taken by the government, with the tariff shield, the consumer’s electricity bill would have been multiplied by 1.5 in February, affirmed the Minister of the Budget, Olivier Dussopt, on Europe 1 on March 11.
The main criticism made in France of this European structuring of the price of electricity consists in saying that it is problematic with regard to the French energy mix. In fact, gas only accounted for 6% of the French mix in 2021, compared to 69% for nuclear, according to RTE. A situation that Marine Le Pen opposes to that of Germany. “We are not going to pay for their dependence on Russian gas either”, she was annoyed on BFMTV on March 1. The criticism, however, is a bit simplistic.
In Germany, for the first half of 2021, only 14% of electricity was produced from natural gas, according to the Destatis Institute, the German equivalent of INSEE. Coal (27%) and wind power (22%) were the main sources of power across the Rhine, nuclear accounting for 12%, Berlin betting mainly on these two solutions after having recorded the exit from the atom for the end of 2022 The fact remains that the French energy mix, which relies heavily on nuclear power, is very different from those of its European neighbours. “In Europe, gas represents between 20 and 25% of electricity production”believes Jacques Percebois.
For French electricity producers, who produce less expensive electricity than their European competitors, this common structuring of the price constitutes an appreciable financial windfall, underline the experts.
“Everyone sells at the same price as gas plants. So for those who produce cheaper, it creates an income.”
Jacques Percebois, economistat franceinfo
“It’s a non-negligible income. Without the price increase, EDF would not earn as much moneyabounds Anna Créti. Even if EDF produces its electricity for 60 euros, it sells it today for 500.”
Several presidential candidates have said they want to get out of this market (at least temporarily) or reform it. Within the government itself, the Minister of the Economy Bruno Le Maire qualified in September on Public Senate this system of“aberrant” and D’“obsolete”while calling for “review it from top to bottom”. Is all this really possible?
In any case, it would still be necessary to appeal to an international energy market. “If we had a national market, we could not cover needs solely with our energy mix”explains Anna Creti. “It is very common in winter for France to be an importer around 6 p.m., and an exporter in the middle of the day”, explains Thomas Reverdy, professor of economic sociology at the University of Grenoble. According to RTE, “2021 had 78 days with a daily import balance, i.e. 35 days more than in 2020”. Dbecoming self-sufficient in electricity is therefore unthinkable in the short term.
“If we didn’t import electricity, we would have to build new equipment, which would not work permanently and would therefore not be profitable.”
Jacques Percebois, economistat franceinfo
Could we however leave this common market while continuing to import? “We could very well imagine a much more planned and regulated solution in France and continue to exchange with our neighbors on the wholesale price. This is what a certain number of American states are doing. Technically, it is possible”says Thomas Reverdy. “We could import without going through the wholesale market, which is what we did before, with a border market. We could create a national market where the price would depend on the country’s mix, and limit the market wholesale at interconnections”abounds Jacques Percebois.
From a practical point of view, however, a reform of the common market would be extremely complicated. According to Anna Creti, “to reform or exit the market would take more than five years”. Same story on the side of Jacques Percebois: “Reform can only be collective. If there is reform, it will be concerted.” With a decision that must be taken unanimously of the countries that make it up, it is difficult to imagine a consensus emerging. Especially since a number of countries, particularly in Eastern Europe, have no interest in leaving this market.
Above all, returning to the single electricity market would for many people call into question the very logic of Europe. “If we call into question the electricity market, we call into question all the common markets, and even the principle of export and import”says Anna Creti.
Leaving the market means questioning European directives, the single market… almost Europe.”
Jacques Percebois, economistat franceinfo
What about a temporary exit, “by decree” as Valérie Pécresse suggests? Impossible, answer the experts interviewed. “France should no longer respect European directivesexplains Jacques Percebois. Otherwise, force majeure would have to be invoked. But at that point, there are some who will say that they are getting out of the gas market, others from the soybean or wheat market… It would be irresponsible.”
There is a solution much more simple way to deal with the rise in the price of gas, says the economist: “The ideal short-term solution is to reduce demand during peak hours, by finding incentives to consume less. If we reduce demand at these times, we will no longer need to call on power stations. gas. It has to be done at European level, but it would be very effective.”