Letter on EU Electricity Market Reform

To: EU Member States’ Heads of Government Cc: Ministers in charge of energy, EU Institutions Munich, 07 September 2022 Need for Resilient EU Electricity Market Policy-Making Dear excellencies, the European electricity system is the most complex man-made machine ever built, which we increasingly understand requires harmonised European rules for its operation and market functioning. The current energy crisis is a prime example of why more Europe is needed urgently and where the obvious challenges related to short-term affordability and security of supply bring about immediate need for action, which should not deteriorate future sectoral performance. Unfortunately, we still see a divide in the responsibilities for OMNIA is an advisory company working for long-term planning and a tendency to push International Organisations, European for national measures and interventions, Institutions, national governments, and based on a misunderstanding of the optimal regulators, as well as grid operators and operation of the European electricity sector. energy majors in reforming energy markets and supporting sustainable transition With this writing, I would like to urge you to re- processes. Over many years and in various consider announced national actions, as roles, we have been involved in the they will hamper the long-term efficiency design, regulation, and implementation of and hence further increase future energy the EU electricity target model. costs and lower operational supply security. The main issue that I would like to draw your attention to is the tendency to push for interventions into the merit-order based price formation in the day-ahead electricity market, the main price-setting instrument of the European wholesale electricity sector. This market segment has been designed with the involvement of hundreds of the most knowledgeable and senior experts of this continent over many years. Its existence and functioning make up one of the diamonds of European Integration. The performance of the EU’s day-ahead electricity market is unquestioned by experts due to its achievement to optimise powerplant and grid operation close to real-time to ensure security of supply and provide robust price signals. In doing so, its main purpose is to indicate the actual prices of a scarce product, where higher prices show that there is a need for investment due to a shortage of reliable supply. The latter, unfortunately, is observable these days and has resulted from delayed investment in electricity generation over the last decades as well as underinvestment in flexible demand. OMNIA GmbH, Sternstr. 1, D-85622 Feldkirchen (Munich) 1 Changing the indicator for this short-coming by influencing price formation in the day- ahead market, will not solve the problem, but further exacerbate it. The right measures for ensuring efficiency, low sector costs and affordability are: - For the long-term horizon: Establish a true European electricity generation adequacy procedure which is tied to a pan-European capacity remuneration mechanism to cater for the fixed cost refinancing of the respective investments based on adequate investment incentives, as the failure of the national instruments has led to the current crisis - For the medium-term: Promote demand-side flexibility on both industry and household levels and oblige the reinvestment of profits on the electricity markets which exceed the long-term variable operational costs - For the short term: Introduce direct subsidies for electricity supply for a well-targeted group of consumers and strengthen the market monitoring power of regulators to avoid abuse of the current situation by focussing on market price, generation, consumption and flexibility forecast mechanisms. The EU’s day-ahead electricity market is not the problem of the current crisis, its high prices are a symptom. For that, I invite you to reconsider national interventions and increase European competences for both the medium and long-term actions needed to avoid future crises. The limited European competences for long-term sectoral planning led to a focus on the shorter-term energy sector operation optimisation. The strategic planning through strategies and adequate mechanisms alone can fix problems like the well-known missing-money problem. For the short-term, national subsidies will be needed that should, however, not interfere with the wholesale markets. In the light of the current developments and the soon to be established changes to the electricity market design, I wholeheartedly invite you to do the right thing to lower sector costs in the long run for the generations to come through more European long-term strategic planning actions and less interference in functioning markets. Please do not take antimarket or anti-European short-termist measures, but instead emphasise the need to rely on each other for operational security and start to do the same for the energy system development timeframes. Doing so will have a substantial impact on mitigating the impacts of the current crisis and will enhance the overall resilience of the European electricity markets. Best regards, Andreas Pointvogl Managing Partner, OMNIA GmbH OMNIA GmbH, Sternstr. 1, D-85622 Feldkirchen (Munich) 2 Saatja: "Andreas Pointvogl" <[email protected]> Saaja: [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], "Gerrit Mäesalu" <[email protected]>, [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected] Teema: Letter on EU Electricity Market Reform Kuupäev: 2022-09-08 09:50 Ladies and Gentlemen, Please find attached correspondence addressed to the attention of the EU Member States’ Heads of Government. Kind regards, Andreas Pointvogl Andreas Pointvogl Managing Partner OMNIA GmbH Mobile: &#43;49 151 1171 2020 Landline: &#43;49 89 20 190 191 E-mail: [email protected] Web: www.omnia-energy.eu Address: Sternstr. 1, D-85622 Feldkirchen (Munich) Disclaimer ​