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Lessons learnt from the extremely volatile energy market

The crisis affecting the European energy industry has been going on for more than a year now, following first the economic recovery, then record-high prices and now Russia’s aggression on Ukraine which brought disruption to the gas supplies and the overall functioning of the electricity market.

Surely, the country that has been affected the most is Ukraine which has made important steps towards the synchronisation with the Continental Transmission System Operators (TSOs) but still, there are some technical prerequisites to be met, the reason why also exports from Ukraine to other countries are still blocked, causing some financial liquidity problems.

The situation is also highly uncertain in the Western Balkans, pointed out Davor Bajs, Electricity infrastructure expert at the Energy Community Secretariat, speaking at the Energy Trading Central & South Eastern Europe conference (ETCSEE), which took place in Budapest on 15-16 June.

“These are low-income countries so these high prices are creating some turmoils,” he said. “Especially companies in North Macedonia and Kosovo are facing some challenges.”

A well-thought reform of the market design

The politicised aspect of the market design debate was also recognised by Christian Baer, Secretary General of the Association of European Energy Exchanges, Europex. Indeed, even the president of the European Commission, Ursula von der Leyen has recognised that the bloc’s electricity market “does not work anymore” and a reform is needed. Responding to questions from the European Parliament last week, she said that the tools adopted are only a short-term relief that will not change the structure of the market, which is still the one designed in a way that worked 20 years ago when renewables were just coming into the picture and were the most expensive sources of energy.

“Today the market is completely different and renewables are the less expensive sources while gas is the most expensive one and it is the one defining the whole prices. This market system doesn’t work anymore,” she said.

And the latest Final Assessment of the EU Wholesale Electricity Market Design released by the EU Agency for the Cooperation of Energy Regulators (ACER) is also warning against ill-designed measures that can bring unintended consequences.

“We are expecting the electricity market to be more volatile because of renewables, so it is important to strengthen PPAs so that more renewables can enter the market and to ensure affordability for those vulnerable users,” said Csilla Bartok, Team Leader for Gas Markets and Energy Retail at ACER.

“The political dilemma today is to find the balance to protect vulnerable users but also allow the market to progress with investments, through flexible solutions and a push ahead for the transition,” she added.

Among the report’s recommendations, she mentioned public intervention to establish hedging instruments against future price shocks. Second, to consider a temporary relief valve for the future when wholesale prices rise unusually rapidly to high levels.

Challenges ahead

For Mrs Bartok, one of the challenges that we can expect in the gas market is related to the storage levels. It seems that countries are doing well to meet the Commission’s targets but the maintenance of Nord Stream 1 expected in July will slow down the filling rate.

“The second important aspect is the monthly savings,” she continued. “There is a difference between reduction and saving. We need to pay attention to that and use more innovative technologies and high prices are helping us to focus on this a bit more.”

For Mr Baer, a part of the solution will be to try to suppress the global demand overall.

“We have some purchasing power as a continent,” he said. “But, because of the challenges represented by these storage filling targets, we will lose that power. We cannot bring down gas prices with the reform of the market design, we will do it by suppressing demand.”

But, of course, the main question is: will our supply be secured next winter?

For Mr Bajs, it will be hard. Countries like North Macedonia may have some troubles this winter and cross-border capacity needs to be allocated more efficiently.

“The procurement of electricity from the market would solve the problem of gas supply, however, there are still some technical requirements to connect Ukraine that would take up to 18 months for the synchronisation to take place,” he concluded. “We hope that ENTSO-E will change a bit its approach and be more flexible because the final goal is to not jeopardise the overall security of supply.”

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