Electrical Equipment / Components & Telecoms

Due to the frequent occurrence of extreme climates such as high temperature and drought, the precipitation in some European countries since the beginning of summer has broken records. On the one hand, extreme weather has increased the consumption of electricity in Europe, and on the other hand, it has also seriously affected the production of hydropower and nuclear power in the region. Under the impact of energy supply crunch, electricity prices in the European market continued to soar. As of August 2022, electricity prices in Germany and France are close to the highest levels in history, and the transaction price of electricity delivered in Germany in 2023 has reached 1,000 euros/MWh; the baseload power contract price delivered in France in 2023 will reach 1,200 euros/megawatt Watt-hour prices are high.

At the same time, the conflict between Russia and Ukraine has also brought a series of challenges to the energy supply of European countries. Ursula von der Leyen, President of the European Commission, said on August 30, local time, that the operation of the EU electricity market has already experienced great problems. On the same day, Gazprom reduced the volume of natural gas sent to France. On August 31, 2022, Gazprom's natural gas supply to Europe through the "Beixi-1" pipeline has been suspended, and maintenance will be carried out for a period of four days (August 31-September 3). As the main natural gas supply route in Europe, the natural gas supply of the "Nord Stream" pipeline is very important. Russia reduced the "Nord Stream-1" natural gas supply by 60% in June and 20% in July, and reduced or partially reduced the supply. Cut off natural gas to Bulgaria, Finland, France, Germany and other countries. If Russia continues to restrict natural gas supply during this year's heating season, it will greatly increase the risk of electricity shortages in European countries this winter, which may lead to a blackout crisis.

In the EU's primary energy structure, oil and natural gas account for about 60%, and they mainly rely on imports. With the further reduction of natural gas supply, once the cold weather occurs in winter, the existing natural gas reserves in Europe cannot meet the heating needs of residents, and the energy crunch will continue to intensify. Under the circumstance that the energy supply in winter is insufficient to meet the electricity demand of EU countries, the price of natural gas in Europe will continue to soar, which will also push up electricity prices, and the operation of the European electricity market will face increasing price risks and pressures. In order to reduce dependence on Russia's imported fossil fuels, more and more European countries are more clear about the future transition to renewable energy. The conflict between Russia and Ukraine and a series of natural gas restrictions will accelerate this process. Parts of Europe have pledged to increase offshore wind capacity, unanimously calling for reducing the EU's reliance on Russian fossil fuels and decoupling gas and electricity prices.

The sharp rise in electricity prices has exposed the inadequacy of the current electricity price design mechanism in Europe, and a structural reform of the European electricity market is needed. On August 29, European Commission President von der Leyen said at the 17th Bled Strategy Forum (BSF) that the EU's electricity market pricing system is no longer functioning properly, and plans need to be formulated to intervene in the short term to curb soaring electricity prices. electricity costs and overhaul its design over the long term to break the link between gas and electricity prices.

The current electricity price mechanism in the European electricity market is set based on the relationship between energy supply and demand (Pay as Clear). Among them, the price of electricity from renewable energy is the lowest, because its short-term marginal cost is extremely low or about zero. Therefore, the market will give priority to lower-priced renewable energy electricity, and then choose higher-priced fossil energy electricity until the marginal electricity demand is met. Electricity prices in Europe are currently mainly set by gas-fired power plants. Gas-electricity is the price balancing market. All winning bidders receive a unified system clearing price based on their prices. As the main energy source of the EU electricity market, the price increase of natural gas will continue to push up electricity costs and directly affect electricity pricing. While the marginal pricing model is conducive to efficient market operation, it can incentivize renewable energy investment. However, under the influence of emergencies such as extreme weather and international disputes, the electricity price fluctuations in the electricity market with a high proportion of renewable energy are uncontrollable. Energy prices in Europe plummeted the next day after the European Union said it would take measures to curb soaring electricity prices, and there was great uncertainty in the market, with energy prices fluctuating wildly.

How to coordinate low-carbon environmental goals and market economy to design a power market with a high proportion of renewable energy is an issue that EU countries need to consider carefully. German Deputy Chancellor and Economy Minister Habeck said that it will study how to better formulate electricity pricing mechanisms at the European level, such as setting a fixed ceiling on natural gas prices. At present, the short-term solutions discussed by the European Commission can be roughly divided into three categories: one is to set a market price ceiling or restrict the entry of high-priced units into the market, but artificially set unit prices to go online will affect the efficiency of market operations; the other is to adjust market prices. The formation mechanism adopts the mode of "clearing by quotation", that is, the transaction electricity of the units is determined according to the order of the unit's quotation from low to high, and the clearing price is "one price for one unit" according to the matching mechanism; Subsidies, power generators do not need to recover all costs through clearing prices. The EU is considering whether compensation for gas generators can be realized through contracts for difference, but such methods are to some extent restrictions on the direct income of gas and electricity suppliers in the market.

Therefore, for the current European power market, a perfect market mechanism not only needs to optimize the price formation mechanism and reduce the fluctuation range of electricity prices, but also needs to ensure the normal profitability of power plants and make market resources reasonable through more accurate price signals. run.