Europe's electricity system is not living up to its promises, according to a French advisory body to the prime minister, which published a report on Tuesday (28 January) largely blaming renewable energy subsidies for this failure.

The EU’s energy policy hinges mostly on power management. However, the European electricity system does not function, according to a French government advisory body, the General Commission for Strategy and Forecasting (Commissariat général à la stratégie et à la prospective - CGSP), which presented the findings of the study on 28 January.

Not living up to the promises

“It’s a policy which has not achieved its objectives,” said Jean Pisani-Ferry, who leads the French advisory body.

Whether on low-carbon growth or boosting competitiveness with lower prices - none of the benefits of a common EU electric policy have materialised, the report says.

Yet, it is difficult to lay the blame on the EU institutions, which have tabled a series of regulations to allow smoother electricity transfers between countries and markets.

“The single energy market is as important as the single currency market in terms of financial impact for European, and as for the euro, the problems are political. The fact that national prerogatives remained in place while we tried to pursue a common energy policy distorted the deal,” says Marc-Olivier Bettzüge, professor of economics and director at the institute of energy economy in Cologne.

Political choices

The fact that Germany interrupted its nuclear production overnight has impacts in terms of guaranteeing supplies, but also in terms of price. Massive subsidies for renewable energy are weighing on French industry, which is struggling to maintain its profitability. In this case too, political choices affect the consumer.

Finally, the European emissions trading system for carbon dioxide is also dysfunctional, with prices hovering at €5 per tonne of CO2, well below the €40 which analysts say is needed to abandon the use of high-emitting coal.

Indeed, the lack of predictability of carbon prices after 2020 encouraged stakeholders to leave the market.

However, political choices cannot explain the problem on their own, according to Fabien Roques, an economist and consultant at Compass Lexecon who contributed to the study.

Renewable subsidies

Comparing the EU and US energy markets, Roques points out that America uses more gas than coal, while Europe, which has a carbon market, is going in the opposite direction.

Roques is quick to blame the EU's "aberrant" renewable energy policy for this, saying the share of electricity subject to market forces decreases if subsidies are kept for part of the electricity production.

“Renewable energies eventually cannibalise their own competitiveness,” Roques notes, saying the decline in wholesale electricity prices driven by renewable energies prevents them from being competitive without subsidies in the long term.

Economists are unanimous on the low economic efficiency of excessive subsidies for renewables. Total subsidies are estimated at $13 billion in Germany, despite their efficiency on terms of energy production.

Obsolete market

As for the market, Fabien Roques thinks it can be improved. The spot market for electricity as it exists today was designed for thermal power plants running on gas or coal, whose availability is easily predictable from one day to the next. The market thus operates one day before its opening.

But the emergence of renewables has turned things around: the market should now be able to make predictions on power availability up to the hour, even though it was not designed to function that way.

“Therefore, the messages sent by the market are not good - the impact of scarcity on the very short term are not reflected on price, while on the contrary, overcapacity is taken into account.”

The result is depressed or even negative prices, especially in Spain or Germany.

The answer to these multiple failures is not simple, but researchers suggest taking inspiration from the UK, where a carbon price floor was established, which could inspire future EU policies.