EU power market ‘broken’, driven by politics, official admits

European Union attempts to create a single market for electricity are hampered by “legacy decisions” made by member states on energy mix, and political decisions to subsidise coal, gas and nuclear power, rendering it “fundamentally flawed”, said a senior EU official.

Marie Donnelly, one of the most senior officials at the European Commission’s energy directorate, sought to set the record straight about subsidies to the energy sector during an event hosted in the European Parliament on Thursday (29 September).

In a normal market, the least profitable players are simply driven out, she said. But this is not the case in Europe, where inefficient players are being subsidised for political reasons.

“Those who are least profitable in the energy system are not exiting the market,” she remarked. “On the contrary, we’re now looking at ‘capacity mechanisms’ which will actually subvent them to stay,” she said in reference to decisions made in Poland, Germany or Britain to support coal and gas-fired power plants as backup for intermittent renewable energy.

“And that generation capacity – I’ll be brutally honest – much of it was state-funded. In Norway, your hydropower was state-funded, it was not the market. For me, that’s a subsidy. The nuclear power system, we have never been able to get real information as to what the state subsidy was.”

“So, I’m not here to defend support schemes for renewables, but let’s have a realistic analysis of what our starting point is. And let’s try to be even-handed in the way we look at things.”

Calls to end renewable subsidies

Donnelly, an Irish official known for her straight-talking style, was speaking in response to calls for EU countries to end subsidies for “mature” renewable energies, such as onshore wind and solar photovoltaics, which are now becoming competitive compared to fossil fuels.

Pekka Lundmark, the CEO of Fortum, a Finnish energy company that was supporting the Parliament event, said €12 trillion in investments were needed in order to keep the planet’s warming within the 2°C limit set out by global leaders at the UN conference in Paris last December.

“Prices on the market do not reflect the true costs anymore,” Lundmark said, pointing out that solar and wind power have created oversupply on the electricity market, depressing prices and discouraging investments as a result.

“Fixed feed-in tariffs are distorting the market,” he said, calling for the subsidies to be abolished and normal market conditions to be restored in order to unlock much-needed private sector investments.

Lundmark was echoing calls by the so-called Magritte Group of ten energy CEOs who have asked for an end to renewable energy subsidies, saying they add too much power to an already depressed market struggling with overcapacity.

But Donnelly suggested those calls were somewhat deceitful.

“There’s a certain element of childish jealousy. You know, ‘renewables get support and we want support too’. But the argument prevailing with politicians is that we need [capacity mechanisms] for security of supply reasons,” she remarked.

“The electricity market in Europe today is broken. We have acknowledged that. And it’s broken in a number of ways,” she said, citing overcapacity caused by the economic crisis and energy efficiency measures whose combined effects have depressed demand.

For her, it is clear that “a policy decision is being taken to maintain overcapacity in the market. That’s a political decision, not a market decision,” she said, describing capacity mechanisms as “another pillar of distortion in the marketplace”.

Renewable subsidies set to continue

Donnelly was also adamant that renewable energy subsidies need to be maintained, at least for the coming ten years. “But the support must be very, very precise,” she said, and afforded in an open, transparent and competitive manner to ensure the support is “just what’s needed”.

“Our objective is to deliver on what the heads of states and governments have set as political objectives,” she said referring to the EU target of reaching a 27% penetration for renewable energy by 2030, alongside a 40% reduction in greenhouse gas emissions by the same date.

Stopping renewable subsidies now would contradict this political objective and “kill renewables going”, Donnelly said.

“The bottom line is, we are the world leaders on renewables. And if we now turn around and back away from that objective, not only do we lose our leadership position, but we jeopardise the global response to climate change” because European technology is exported across the globe and helping other countries meet their own climate objectives.

“The first thing we have to remember is that the energy transition in Europe is a very deliberate political choice. This is not market-driven. This is policy-driven,” she stressed.