4th Dec 2023


EU power reform expands role of the state

  • This week's reforms could significantly increase state control over power prices (Photo: European Commission)
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After months of bickering, EU countries finally agreed on a series of short-term reforms this week that could drastically change the way the power market operates in the coming years.

The reform was meant as a quick intervention. It took so long to finalise a plan due to a long-running disagreement between French and German negotiators.

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While France demanded more leeway to financially support its ageing nuclear fleet, Germany and other member states, including Italy and current EU president Spain, worried this would give French industry an unfair advantage and pushed for more limited state intervention.

But Tuesday's document tentatively suggests France did come on top and French energy transition minister Agnès Pannier-Runacher described the deal as a "victory."

At the core of the reform are contracts.

This may sound inconsequential, but if these so-called two-sided contracts-for-differences (CfDs) become the standard, governments can claw back surplus revenues if prices exceed a specific limit, preventing a repeat of last year's energy price crisis.

It also introduces a price floor which protects power producers if market prices drop below the minimum. This further increases the state's role in the power market, which German, Dutch and other market-liberal-minded member states feared might distort the market.

But by making these contracts voluntary (a German demand) — as opposed to enforcing a state-imposed price cap as introduced during the height of the energy crisis — and allowing price flexibility between the upper and lower limit, the market can still efficiently steer available power supply to where it is needed, the thinking goes.

The reform allows for using CfDs for nuclear power plants and prolonging existing facilities, a French demand. This, however, puts the 'voluntary' element of the agreement, which Germany demanded, in perspective.

France is 70-percent reliant on existing nuclear power, and supply comes from just one company: EDF, which was fully nationalised at the start of the year.

This suggests France has total control over prices, which aligns with a promise made by French president Emmanuel Macron, who in September pledged to "take back control over [electricity] prices."

But to what degree France can actually set the strike price is still "a big question mark," one diplomat who requested anonymity told EUobserver.

Theoretically, the Directorate-General for Competition of the EU Commission has the final say and will approve price setting according to standard state aid rules. But there will be a lot of political pressure, and the stakes are significant.

One preliminary calculation showed that between €6.6bn to €20bn would be available for reducing electricity prices for households or industries in France.

Italy and Germany, during negotiations, feared this might give French industry an unfair advantage, but for now, France seemed to have won the argument.

Member states will next debate the file with the EU Parliament. Exploratory discussions took place on Thursday, but negotiations will start in earnest on 16 November, which may still alter the text, with MEPs likely pushing for a more conservative use of state subsidies. "We aim to maintain a level playing field among member states and avoid internal market fragmentation," one MEP told EUobserver on condition of anonymity.

"Our mandate gives more clarity about the application of CfDs because we introduce a limitation for existing facilities," said the MEP, adding that the "coverage offered by the CfDs should be proportional to the investment made."

A new system?

So, what will the new power system look like? Last year's prices led to a situation where profits were so high some power suppliers were able to recoup their investment in wind or solar projects in two years.

Under the new contract, this would no longer be possible. On the upside, investors in renewables would face much less uncertainty about future prices. Lower perceived risk lowers the cost of capital for renewable energy projects, improving their competitiveness compared to gas.

If renewable energy deployment continues to speed up as expected, around 50 percent of all wind and solar energy will be under two-way contracts by 2030, German think tank Agora Energiewende calculated earlier this year.

Much of the rest will be via direct power purchase agreements between suppliers and large consumers like Google, Microsoft or Amazon that need a steady supply for their data centres.

This means consumers will rely more on the state for price security, which "perpetuates the state's role as an actor in the energy system," Christoph Maurer said on Bluesky. "This aligns with the current Zeitgeist. Whether it is lasting or desirable depends on how the state perceives its role."

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