The Electricity Market Reform Bargain
But also — AI in elections, EU-US Summit, Stability and Growth Pact, CSRD, Israel-Hamas
Hi! This is Wednesday, 25 October 2023, and here’s the EU news you need this week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The Briefing
On October 17, the EU energy ministers finally reached an agreement on a proposal to reform the electricity market. Over the past few months, the twenty-seven Member States had failed to agree on the details of this reform, which crystallized tensions over nuclear energy between France and Germany.
CONTEXT • Since July 2021, the European Commission has been addressing rising energy prices, which reached their peak in 2022 due to Russia's invasion of Ukraine. The electricity market reform is the EU's long-term response to these challenges.
On March 14, the Commission proposed two regulations to carry out this reform, with the primary goal of reducing prices. The agreement reached last week pertains to one of these two regulations. The first, more consensual regulation had already been agreed upon in June.
CONTENT • Energy ministers aim to maintain the current functioning of the market. The "merit order" system, which indexes electricity prices to fossil fuel prices, remains unchanged in the agreement reached last week.
This system operates as follows: to ensure the EU's electricity supply, power plants with the lowest production costs (renewables) are prioritized. A stacking process follows: when these plants cannot meet demand, other sources of electricity are mobilized, starting with the least expensive (nuclear plants) and moving to the more expensive (fossil fuel plants) if necessary.
Electricity prices are thus indexed to the price of the last electricity source used to meet demand, often fossil fuels like gas and coal. This system came under criticism after the surge in gas prices led to a significant increase in electricity prices in 2022.
While the Commission's reform proposal and the Council's agreement retain this operational principle, the measures envisaged aim to provide better electricity contract options for consumers, ensure more stable prices for businesses, and promote the construction of renewable and nuclear power plants to reduce the need for fossil fuel plants.
CFDs • The text underwent lengthy and intense discussions. The primary point of contention among member states concerned the use of "contracts for difference" (CfDs).
These contracts are concluded by public authorities to encourage private investment in clean energy. They operate using a system of price floors and price ceilings:
On one hand, these contracts raise the price paid on the electricity market if it falls below a certain level (the state covers the difference). This guarantees electricity producers a stable income, enabling them to amortize investments.
On one hand, these contracts raise the price paid on the electricity market if it falls below a certain level (the state covers the difference). This ensures a stable income for electricity producers, enabling them to recoup their investments.
On the other, these contracts require the producer to repay excessive profits when the market price exceeds a certain level (the state recovers the difference, subsequently redistributed to consumers).
The issue on which states disagreed was which types of power plants these contracts could be used for:
France wanted to use these contracts to finance not only the construction of new nuclear plants but also the extension of the lifespan of existing ones, in addition to renewable energies. Many power plants will need to be extended by 2040.
Germany, supported by Austria and Luxembourg, strongly opposed the use of contracts for existing plants. Berlin feared that Paris would use these contracts too extensively to finance its entire nuclear power fleet and offer lower electricity prices to its industry, potentially creating a distortion of competition within the internal market.
In the end, the agreement is a victory for both sides of the Rhine: any new plant can be financed by a contract for difference, and Paris can also use this method to finance existing plants. At Germany's request, the agreement stipulates that the Commission must ensure that these contracts do not create a distortion of competition within the internal market.
CAPACITY MECHANISMS • Another point of disagreement concerned capacity mechanisms. These mechanisms aim to finance production capacities, not production itself. In other words, a power plant can receive funding for its availability, even if it does not produce.
Here, the issue was the financing of fossil fuel plants, particularly coal-fired power plants, through this mechanism. On this point, Poland successfully argued that coal-fired plants should receive funding and be extended. Several European Parliament members have already expressed their opposition to this measure.
NEXT STEPS • The political agreement in the EU Council formally initiates negotiations with the European Parliament to reach an agreement on the text. The Parliament adopted its position on the text on September 14.
In Case You Missed It
AI • In its latest report, the European Agency for Cybersecurity (ENISA) warns of the risks associated with artificial intelligence (AI) in the run-up to the 2024 European elections.
Recent incidents in Poland and the U.K. provide a preview of the disinformation risks associated with AI:
In early October, a fake recording of Keir Starmer insulting employees was heard by hundreds of thousands of users on Twitter.
In Poland, the Civic Platform, the main opposition party, admitted to generating a fake recording of Mateusz Morawiecki's voice during the election period.
In addition to these deepfakes, ENISA highlights two other key ways in which hackers exploit AI: the creation of phishing emails and the collection of confidential data.
ENISA's report also underscores a general increase in cyber threats. Distributed denial of service attacks (aimed at disrupting websites) and ransomware attacks have seen a significant rise.
From July 2022 to June 2023, ENISA recorded more than 2,500 cyber incidents, with 220 targeting governments. Public administrations and healthcare sectors are prime targets, confirming that AI is a significant threat to critical infrastructure and essential services in Europe.
TRANSAT • After the first EU-US summit in June 2021, the leaders of European institutions and President Joe Biden met again on Friday, October 20, in Washington.
In addition to foreign policy issues, Europeans and Americans aimed to normalize their trade policy, as numerous disagreements persist across the Atlantic.
One of the main concerns is the customs tariffs on steel and aluminum imposed by the Trump administration in 2018 and suspended for the past two years. On this point, the summit statement acknowledges a failure and defers to future negotiations. Time is running out because if no agreement is reached beyond October 31, customs duties should be automatically reinstated.
Regarding access for European companies, particularly automakers, to American Inflation Reduction Act (IRA) subsidies, progress in the negotiations was highlighted but did not lead to an agreement.
SGP• EU-27 finance ministers, meeting in Luxembourg on October 17, attempted to find a compromise on the reform of the Stability and Growth Pact (SGP), which sets the debt and public deficit obligations for EU member states.
The Commission presented reform proposals for the current rules in April last year.
While discussions among the twenty-seven on the reform have stalled, there is a consensus on the need to reach an agreement quickly to avoid a return to the old rules, which the majority of member states want to avoid.
The main points of contention concern the exact rates of debt reduction averaged over several years, investment spending authorizations, and the method for enforcing these commitments and assessing deficits separately from debt.
Taking into account frugal states' criticism, the Commission added several safeguards to its proposal, including an obligation for countries with deficits exceeding 3% of GDP to reduce their spending by 0.5% of GDP annually.
Spanish Finance Minister Nadia Calviño announced that Spain will present a proposal to the EU Council in November.
CSRD • Last week, the Parliament adopted the delegated act of the Corporate Sustainability Reporting Directive (CSRD) on sustainability reports by companies.
A motion, brought by German and Czech MEPs seeking to reject this text, had been filed. They pointed out the complexity of the reporting requirements that companies will have to implement, especially given the current economic situation.
This veto was ultimately rejected by the parliamentarians, with a majority of 57%. The text will, therefore, come into effect at the beginning of 2024 for all companies with more than 500 employees operating in Europe, with SMEs receiving additional time to publish their first report.
MIDDLE EAST • With 500 votes in favor and 20 against, the Parliament adopted a resolution on Thursday calling for a humanitarian pause in Gaza and increased humanitarian assistance to the civilian population of the region.
MEPs also call for the immediate release of hostages and recognize Israel's right to legitimate defense "as enshrined and framed by international humanitarian law."
As the European Union is criticized for its lack of coordination in responding to the conflict, particularly due to contradictory statements within institutions, this resolution represents the first common position expressed by MEPs since October 7.
What We’ve Been Reading
The European political community plays a unique role that should not be underestimated, argues Luigi Scazzieri of the CER.
The American Inflation Reduction Act will have only a marginal impact on the European economy, according to an analysis by Maxime Fajeau and others published in VoxEU. The authors encourage the Union to focus its efforts on defining its industrial policy doctrine and controlling energy costs.
This edition was prepared by Luna Ricci, Kimia Vaye, Marwan Ben Moussa, Guillaume Renée, Maxence de La Rochère, and Augustin Bourleaud. See you next week!