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    European energy sector employers lobby against the Iberian exemption

    May 6, 2022 - CE Noticias Financieras


      The European Federation of Energy Traders (whose members include EDP, Endesa, Galp and Iberdrola), Eurelectric (which is the federation of the European electricity industry), Europex, which is the association of European market operators(including the Spanish OMIE and Mibgas) and the European solar photovoltaic (SolarPower Europe) and wind power (WindEurope) industry associations have sent a letter to the President of the European Commission, Ursula Von der Leyen, and to the heads of state and government throughout the Union, in which they state that the European electricity markets have demonstrated "high efficiency" in terms of security of supply for consumers and security of supply for the European Union, and to heads of state and government across the Union, saying that European electricity markets have demonstrated "high efficiency" in terms of security of supply for consumers and in terms of providing incentives for clean energy investors, and urging the European Commission and all Member States to avoid changing the current electricity pricing mechanism.

      Electricity prices are skyrocketing across Europe. The average price of electricity on the daily wholesale market in April in Spain was 191.69 euros per megawatt hour (E/MWh), 194.6% higher than the average price in April 2021, hence the Spanish government has decided to request the cap on the price of gas (natural gas used in electricity generation). According to most experts, the cap requested by Spain (50 euros per megawatt hour of gas) will result in an electricity price of around 120-130 euros per megawatt hour, i.e. approximately 60 euros below the average price recorded last month.

      European electricity sector employers are now expressing their opposition to this proposal, considering that the measure could jeopardize investments in new renewable installations. The main idea would be that, if the market is not as profitable as it is now for the electricity companies and other agents in the sector, they will not invest in new renewable electricity production facilities, which are necessary for the European Union to become energy independent from Russian coal, oil and gas, and which are necessary for the EU to meet its energy-climate commitments (to reduce CO2 emissions by 55% by 2030, for example).

      From the government's side, what is being proposed is a limit that would not neutralize the profit of the sector's players, but would reduce the exorbitant profits that the sector is obtaining with the escalation of the price of electricity. In fact, if the green light is finally given to the E50 cap and indeed the average price of electricity in the Iberian wholesale market remains around 120-130 euros, as experts predict, that price would still be far-much higher than the average price of electricity in the Iberian wholesale market recorded in 2018 (57.29 E/MWh), 2019 (47.68) and 2020 (33.96), and also above the 2021 price, which has been the highest in history (111.9).

      According to the signatories

      "In the short term, measures to protect vulnerable consumers are essential - say the signatories - but the only real sustainable solution to the current crisis is to move away from fossil fuels, invest massively in clean energy alternatives, accelerate energy savings and unlock demand response. Preserving market signals and ensuring certainty for investors are critical to channel adequate volumes of private investment into renewables, carbon neutral energy supply and infrastructure."

      Everything works well

      According to the European employers, on the one hand, "short-term wholesale markets have ensured cost-effective dispatch of power plants, use of transmission grids and settlement of electricity contracts", and on the other hand, forward markets "have protected consumers from short-term market volatility and sent a powerful signal for investments in renewables, energy storage and consumer-driven solutions, including through power purchase agreements and long-term hedging."

      For all these reasons, the employers urge the European Commission and the member states to avoid changing the pricing mechanism, a mechanism that is nevertheless being heavily criticized by consumer organizations, the European environmental movement and several EU governments. The signatories in any case explicitly reject the gas price cap: "interventionist measures such as the capping of wholesale or retail prices should be avoided," they say. The employers' associations also claim that these measures increase the cost of the energy transition.

      In addition, they argue that in the long term they could harm not only electricity suppliers and investors but also consumers, who could be harmed by insufficient integration of European markets, which would have negative effects in terms of social welfare and climate protection, they say.

      The employers' associations do not even consider the temporary implementation of these measures to be positive ("even if they are limited in time," they argue, "they can have lasting effects on industry and the proper functioning of the market"), nor do they believe that they will contribute to reducing European exposure to geopolitical externalities.

      As an alternative, the employers' organizations that signed the letter propose that it should be up to the states to pay for the mitigating measures. Thus, they ask the Commission to approve direct aid for vulnerable consumers, because it is the most effective and the least distorting way to achieve the EU objective of "clean energy independence".

      These measures should be financed - according to the electricity sector employers - through the high taxes that the states are collecting thanks to the increase in the prices of energy products, "or by other means that do not harm the long-term wholesale market signals and bilateral contracts that are essential for investment in renewable energies".

      The signatories warn that government measures taken in connection with the crisis should not affect long-term contracts that have already been closed, and are materializing in retail activity. Furthermore, they do not want infra-marginal technologies to bear either directly or indirectly the costs of the measure.

      The worst option

      The employers consider it essential to "avoid distortions in the market, preserve the Internal Energy Market and boost investor confidence". And they qualify the Iberian exception as "the worst option, as it undoes the internal energy market and we run the risk of fracturing a strong and united European response".

      The European employers' associations of the solar photovoltaic (SolarPower Europe) and wind (WindEurope) sectors, Europex, which is the association of European market operators (including the Spanish OMIE and Mibgas), Eurelectric (which is the federation of the European electricity industry) and the European Federation of Energy Traders (whose members include EDP, Endesa, Naturgy, Repsol and Iberdrola), conclude their letter with a warning.

      "Any decision in this regard must be taken in close contact with the energy industry, which is prepared to put its experience and know-how at the service of policy makers."

      The letter is dated April 28, two days after Spain's Third Vice President and Minister for Ecological Transition and Demographic Challenge, Teresa Ribera, and Portugal's Minister of Environment and Climate Action, José Duarte Cordeiro, announced the agreement with the Council of Europe to cap the price of gas in the wholesale electricity market.

      The letter sent by European energy sector employers to the President of the European Commission and the Union's Heads of State and Government was not the only one drafted in these frenetic days. This week, the Alliance for the Competitiveness of Spanish Industry, made up of the associations Anfac (automotive), AOP (refining), Aspapel (paper), Feique (chemicals and pharmaceuticals), FIAB (food and beverages), Oficemen (cement) and Unesid (iron and steel), sent the third vice-president, Teresa Ribera, a letter of thanks for "your effort and commitment, which has resulted in the mechanism successfully agreed with the European Commission" (referring to the EC's recognition of the "Iberian exception" and the green light that Brussels has given Spain and Portugal to set a price ceiling for gas).

      "Dear Third Vice-President, from the Alliance for the competitiveness of Spanish industry, we would like to express our sincere thanks for the efforts you are making in the face of the very serious energy crisis we are facing, both you personally and the Government as a whole". So begins the letter from the Alliance for the Competitiveness of Spanish Industry.

      The Alliance considers that, "in a complementary way [to the activity developed by the Government in Brussels], it is also urgent to hold the auctions of infra-marginal technologies foreseen in the Royal Decree-Law 17/2021, as a way to promote bilateral contracts at competitive prices. These auctions - the associations point out - should be aimed at industrial consumers, whether or not they are direct consumers, and their interposed marketers".

      The Alliance, as a representative of "strategic industrial sectors", recognizes in its letter "the measures adopted at national level in favor of industry in recent months and weeks", but declares itself to be very concerned about energy costs. The situation we are facing - the letter literally says - is "dramatic and with no prospect of improvement in the short term". The associations also regret the fact that, having to compete internationally, they are doing so "at a growing cost disadvantage compared to third parties".

      For this reason, the Alliance is "waiting to know what measures will complement those adopted so far and, especially, the details of the mechanism successfully agreed with the European Commission thanks to your firm commitment," they say, addressing the Minister directly. "We need its implementation to have a positive and immediate impact in favor of Spanish industrial competitiveness."

      The Alliance for the Competitiveness of Spanish Industry is made up of seven sectoral associations whose companies generate 55% of the Gross Industrial Product, 4 million direct, indirect and induced jobs, 60% of industrial exports and 60% of investments in R&D&I.

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