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Ursula von der Leyen promises “deep and comprehensive reform” of the electricity market in State of the Union speech

In her annual State of the Union speech, delivered at the European Parliament in Strasbourg, European Commission President Ursula von der Leyen said that we have to decouple the dominant influence of gas on the price of electricity.

“Today our gas market has changed dramatically: from pipeline mainly to increasing amounts of LNG, but the benchmark used in the gas market – the TTF – has not adapted,” highlighted the President of the Commission adding that they will work on establishing a more representative benchmark.

“The current electricity market design – based on merit order – is not doing justice to consumers anymore,” underlined von der Leyen pointing out that consumers should reap the benefits of low-cost renewables.

She also admitted that energy companies are facing severe problems with liquidity in electricity futures markets, which risks the functioning of the energy system and promised to work with market regulators to ease these problems by amending the rules on collateral and by taking measures to limit intra-day price volatility. The Commission will also amend the temporary state aid framework in October to allow for the provision of state guarantees while preserving a level playing field.

“We have to decouple the dominant influence of gas on the price of electricity. This is why we will do a deep and comprehensive reform of the electricity market,” the Commission President announced.

Wearing blue and yellow, von der Leyen pledged to stand by Ukraine and underlined that the EU “should have listened to those who know Putin.” She reminded that while investments in phasing out Russian gas cost a lot, dependency on Russian fossil fuels comes at a much higher price. “We have to get rid of this dependency all over Europe,” she highlighted.

The EU has already taken steps to achieve this. EU leaders agreed on joint storage which now stands at 84 per cent, exceeding the original target. The EU started to diversify away from Russia. Last year Russian gas accounted for 40 per cent of the EU’s gas imports, while today it’s down to 9 per cent pipeline gas. “Unfortunately that will not be enough,” warned the Commission President.

She pointed out that the market setup is not functioning anymore, as Russia keeps on actively manipulating it. In addition the climate crisis is heavily weighing on European energy bills, as heat waves have boosted electricity demand and droughts shut down hydro and nuclear plants. As a result, gas prices have risen by more than 10 times compared to before the pandemic.

EU Energy Ministers agreed last Friday on four key areas in which they expect the European Commission to propose concrete solutions; coordinated electricity demand reduction, capping the revenues of electricity producers with low production costs, a possible price cap on gas and the issue of decreased liquidity.

“In these times, profits must be shared and channelled to those who need it the most. This is why we are proposing a cap on the revenues of companies that produce electricity at a low cost,” said the Commission President adding that they expect to raise more than 140 billion euros for Member States to cushion the blow directly. The fossil fuel industry won’t be left out either and oil, gas and coal companies will also have to pay their fair share.

“These are all emergency and temporary measures we are working on, including our discussions on price caps,” said von der Leyen adding that the EU must ensure security of supply and at the same time, global competitiveness.

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