EU Power Industry Warns Overhaul Risks Killing Market

(Bloomberg) -- European Union nations should be wary of introducing changes into an overhaul of the region’s power market that could create dangerous distortions and undermine investor confidence, according to a key industry body.

The bloc’s 27 member states are locked in negotiations over how best to support the decarbonization of the power sector, with Germany and France locking horns over how much support should be given to prolonging the latter’s aging nuclear facilities. 

Countries are also weighing an optional revenue cap on low-cost producers, like wind and solar, should last year’s price crisis be repeated.

Leonhard Birnbaum, president of Eurelectric, said that such changes could risk being “the end of the market,” by undermining investor confidence and eroding forward markets to such an extent that it would mean that utilities would no longer be able to offer fixed-price contracts to customers. 

“Whatever the solution is, make sure we don’t kill the forward markets,” Birnbaum told Bloomberg News in an interview Wednesday. “If we do that, we have a real problem.”

Environment ministers failed this week to agree a common position on the market overhaul, which aims to accelerate the rollout of renewables and weaken the role of gas in setting prices. A major disagreement centered on how to apply so-called contracts for difference — a way of subsidizing renewables — to prolonging France’s aging nuclear fleet.

Luxembourg’s energy minister Claude Turmes said that could potentially provide state-owned power company Electricite de France SA with a €120 billion check, which he said would undermine the EU’s single market. Countries also disagreed on how to distribute the revenues from such contracts. Sweden, which holds the rotating presidency of the bloc, is still aiming to reach a deal before the end of the month.

Birnbaum, who also serves as chief executive officer of German energy company E.ON SE, acknowledged that prolonging the French nuclear sector would be vital to help provide stability across Europe’s grid during the transition to net-zero. However, it has to be done in a way that is “least market-distortive,” he said.

He also warned that a potential compromise to incorporate an emergency revenue cap on low-cost producers into the power market would harm investments in renewables. It could also potentially jeopardize future investments in the grid infrastructure the EU needs as it electrifies its energy system.

Birnbaum said that Eurelectric would push for an 80% emissions cut by 2040, when the European Commission outlines its goal next year. Advisors to the bloc’s executive branch said that it should be as much as 90%, with all scenarios requiring a huge investment in electricity infrastructure.

With the US’s Inflation Reduction Act, “we have seen an option for investors to go somewhere else,” he said. “If investor confidence is undermined, why would the same investors want to invest in grids?”

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