A tale of two Councils: competitiveness through clean, reliable, affordable power

Two consequential Council meetings took place this week touching on the power sector’s role in a competitive Europe. Breaking it down, Energy Ministers gathered in Luxembourg on Tuesday to discussing this, as well as concerns over wholesale electricity prices, among other things. The sticking theme from there to the gathering of EU Heads of State and Government at the European Council was price concerns which have reemerged as a hot-button topic recently. The conclusions from both Councils and the potential action taken on them will have an impact on both industrial competitiveness in the EU, as well as the power sector’s ability to provide clean, reliable and affordable power to those industrials. We are here to dissect that for you today in this week’s #FridayFeature

Council conclusions

The key and cross-cutting conclusion from this week’s Council meetings was a call from both for EU action to stabilise energy prices. This comes as Member States from Central and Southeast Europe have been dealing with price spikes, causing concern over competitiveness in the region and more broadly across the EU. The impact of high energy prices on competitiveness is a broader song that is also sung in the Draghi report and carries some weight considering that the EU has some of the world’s highest energy prices.

The power sector is a big part of the EU’s growth story, and we recognise that high prices have an impact on competitiveness. But at the same time, we need to make sure that any effort at incentivising industrials does not turn into a disincentive for the power sector. In a letter to Energy Ministers and Heads of State and Government ahead of the Councils, our President and CEO of E.ON , Leo Birnbaum , as well as our Secretary General, Kristian Ruby , urged a carefully crafted and balanced approach that ensures industrials grow together with the power sector, especially regarding demand and supply of electricity and that unwanted trade-offs that come from short-term measures are avoided. So, what to do?

The highs and lows

For some background on the price issue, let’s take a step back to a couple weeks ago when we launched Power Barometer 2024. Highlighted there, we show that wholesale electricity prices have been at highs and lows over the past years. During the COVID-19 pandemic when the economy was shuttered, energy demand fell with it and energy prices followed to a low average of €34/MWh in 2020. Then, spurred on by the economic recovery from COVID-19 and then Russia’s invasion of Ukraine and subsequent energy blackmail, energy prices shot up to a staggering average of €227/MWh in 2022. Since then, prices have fallen but remain above the 2019 average of €46/MWh due to volatility in the price of gas.

This has taken a toll on the EU’s industrial customers who demand large quantities of energy. At the height of the crisis, 35-45% of EU aluminium, zinc, and silicon were taken offline, with risk of permanent smelter closures, in 2022 according to Power Barometer 2023. In this year’s Power Barometer, we found that electricity demand had fallen by 7.5% from 2021-2023, 50% of which was due to industrial decline on the back of high prices.

But while high prices are putting pressure on energy intensives, another phenomenon is striking at the power sector at the same time. Negative prices have also been on the rise. Summing the hours where wholesale prices dropped below zero in 2023, we arrive at 821 – 149 more hours than in 2020 when there was simply not enough demand to soak up electricity production due to economic closures of the pandemic.

In 2024, we have already soared past 2023’s negative price hours, reaching 1,031 by August. This is happening mainly due to peaks in renewable generation – especially solar whose peak generation is when the sun is high in the sky – that is not matched by demand for electricity. This means that there is an inherent disincentive to invest in renewable energy as they undermine investors’ business case and project bankability. At the same time though, it also creates a business case for a rather nascent market for flexibility and storage which is crucial to the energy transition and European competitiveness, as the Draghi report also makes clear.

But beyond negative prices - low power demand, high capital costs and market volatility are also having an impact on the balance sheet of power companies and investment decisions. And while industrials continue to face high prices despite the hours of negative prices, there seems to be no obvious solution. Or is there?

Electrification for clean, reliable and affordable power

“The missing piece between going green and staying competitive is electrifying.” – Kristian Ruby

In the face of this dilemma, we need to consider what will have the surest potential to strengthen European competitiveness while avoiding unintended consequences on energy prices with hurried interventions. Investor capital is sorely needed for the power sector to deliver on an energy system that is clean, reliable and affordable for industrials to be competitive. Electrification is the one sure bet we have to get us there.

While electrification is struggling in the EU, having remained stagnant at 23% for over a decade, there are two clear cut ways we can put it in gear and start accelerating. One is to treat it fairly regarding taxation. Currently, taxation policy in Europe still favours gas over electricity, with taxes weighing x1.4 times more in the electricity bill compared to gas. To electrify, we need to make the energy transition reflect in people’s energy bills and incentivises them to electrify. And this brings us to a second point.

An electrification action plan. We’ve said it before, and we will say it again – Europe needs an electrification action plan, and it needs it in the first 100 days of the new European Commission ’s mandate. This coincidentally coincides with Ursula von der Leyen ’s proposed Clean Industrial Deal publication, and we want them to go in tandem.

Earlier this week we published our views on what the Clean Industrial Deal should entail, and an electrification action plan is among the “must haves”. It should set out a clean pathway for industrial electrification to drive demand and at the same time, help industrials benefit from the lower cost of clean energy. This is possible with the uptake of long-term contracts such as power purchase agreements (PPAs) and contracts for difference (CfDs) – affording them certainty about electricity delivery at a stable price.

We won’t go into it in depth here, but the takeaway is that electrification needs to be the priority to tackle competitiveness concerns in Europe, and we should set our sights on this long-term goal, rather than short-term buffers. 100 days is not too far away, and the power sector’s sights are already pointing that way.

This week's edition written by:

Nicholas A. Steinwand , Policy Communications Advisor - Eurelectric

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