All the slaps of Draghi to renewables
Speaking at the Rimini meeting, Draghi said that it no longer makes sense to link electricity and gas prices, and that renewable operators "have achieved the highest profits". Here's how the pricing mechanism works and what the alternatives are
In his speech at the Rimini Meeting, Prime Minister Mario Draghi anticipated that the European Commission is working on introducing a gas price cap and decoupling the price of electricity from that of natural gas.
The first proposal will be "presented to the next European Council," he said.
– Read also: All the problems of Draghi's proposal on the roof at the price of gas
THE ELECTRICITY-GAS LINK "MAKES NO MORE SENSE"
As for the second, he explained that the "link between the cost of electricity produced with renewables, and therefore water, sun, wind, and the maximum price of gas every day is a link that no longer makes sense . Renewable energy producers in a world dominated by gas production might need to be subsidized and they have been, and they are a lot even today ”.
“But today”, he argues, “it no longer makes sense that the price of electricity is linked to the maximum price of gas and the producers of renewable energy are the ones who have made the highest profits today”.
THE EXTRA PROFITS OF RENEWABLES
The decree law of last January establishes that "operators who are producing energy without bearing the effects of the exceptional increase in the price of energy", ie renewable operators, "pay a difference calculated taking into account fair prices before the crisis".
"Starting from February 1, 2022 and until December 31, 2022", we read, "on the electricity produced by photovoltaic systems with a power exceeding 20 kW that benefit from fixed tariffs deriving from the Energy Account mechanism, not dependent on prices a two-way compensation mechanism on the price of energy entrusted to the of Energy Services ".
THE RULES OF THE PRICE OF ELECTRICITY
In an article published on lavoce.info , the economist Carlo Stagnaro explained that “today, in the member states of the European Union, the rule of the system marginal price (Smp) is in force. In practice, for each hour of the day a supply curve is constructed by ordering the production plants in increasing order of their marginal costs (mainly: fuel). The equilibrium price reflects the marginal costs of the last plant which must be put into operation to satisfy demand and which, in most cases, is powered by gas ”.
That price, continues Stagnaro, “applies to all offers accepted in that time slot, which is why the system is also known as pay as clear or uniform price . Thus, while the marginal plant covers its operating costs, all the others obtain revenues in excess of their respective short-term marginal costs. Through the so-called inframarginal annuity they recover fixed costs ”.
“Renewable sources, such as wind, photovoltaic and hydroelectric, have practically zero marginal costs”, writes the economist, “and those of nuclear power are also very low. Conversely, all of these sources have high investment costs. For a gas plant, the ratio between investment costs and operating costs is approximately 25-75; for renewables it is the opposite ".
“It follows that, the more the share of green electricity increases, the wider the gap between the marginal costs and the average costs of the system. The increases in the price of gas amplify the phenomenon ”, concludes Stagnaro.
THE ALTERNATIVE
The economist of the Bruno Leoni Institute, an energy expert, writes that, as an alternative to the system marginal price , pay as bid mechanisms could be used, "which provide for the payment – for each unit of energy produced – of an amount equal to the value actually requested. when formulating offers ". In Europe, the move to pay as bid is mainly driven by Spain, with the support of Italy, France, Greece and Romania.
PROS AND CONS OF THE SYSTEM MARGINAL PRICE
The system marginal price has two advantages, explains Stagnaro: the first is that “it induces operators to 'reveal' their real marginal costs; the other is that it “guarantees plants with low marginal costs and high fixed costs”, ie renewable ones, “that they will be able to recover the investment through inframarginal rents”.
On the other hand, the system marginal price can favor the abuse of market power: "if an operator knows that, at a certain time, his plant could be marginal, he has an interest in not making it available ( capacity withholding ) by making therefore it is necessary to call a more expensive plant and to raise prices ".
THE CHARACTERISTICS OF PAY AS BID
In a pay-as – bid regime, no one can determine the price of the entire system by himself because "each one, with his bid strategies, establishes the price at which he is available to produce, but does not influence the remuneration of competitors". The pay as bid , then, pushes operators to reveal their reserve costs: these are those costs below which they are not willing to put the plant into operation.
However, an energy operator who has high fixed costs and low variable costs could still bend the mechanism to his advantage, offering a marginal cost close to 0 to have his offer accepted. In the following days it will try to guess the market price, positioning itself slightly below.
WHY WE NEED TO RETHINK THE SYSTEM
According to Stagnaro, we must ask "whether the reasons that led to prefer the SMP still remain valid in a radically changed context, where the marginal price depends more and more on (gas) plants with characteristics that are not at all representative of most of the generation park ( made above all of renewables) ".
Furthermore, "the intermittency of renewables makes the dispatching services market fundamental, which is governed by the pay as bid rule", notes the economist, who thinks that the system marginal price is not an adequate system "for the new forms of electricity markets ".
– Read also: Eni, Enel, A2a, Edison. Does the draghian tax on extra profits work?
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/draghi-rinnovabili-extraprofitti/ on Wed, 24 Aug 2022 13:53:18 +0000.