Portugal: EU energy reform needs clause like Iberian mechanism – government

Portugal is in favour, as part of reforms to the European Union electricity market, of the creation of an “emergency clause” similar to the Iberian mechanism that is currently being used to limit the price of gas used to generate electricity, but the European Commission warn of the risks involved of such measures, and of different energy realities.

At a time when the commission is finalising its proposals for legislation to reform the electricity market to allow better access to lower-cost renewable energy and more stable long-term prices, Portugal’s government has argued, in a written position submitted to the EU executive that is out to public consultation, that “beyond the regular functioning of the market, there is a need to frame the extreme volatility of the market.

“One solution would be to provide for an emergency clause,” the executive stresses in the working document, stressing that “practice has proved that placing a ceiling on market prices has proved effective” – that is, in the Iberian mechanism, which in the government’s view has had “very positive results” since its introduction last May.

“The development of an emergency clause compatible with the EU market, triggered in exceptional circumstances and under a transparent decision-making process, ensures protection against extreme market volatility, without compromising the proper – and much needed – functioning of the market in regular times,” it insists in the position sent to Brussels in mid-February. “Such a clause would strengthen the confidence of market participants and consumers.”

When questioned by Lusa, a senior commission official stressed that “the Spanish and Portuguese measure to lower electricity prices during the energy crisis was considered justified by the particular circumstances of the Iberian electricity wholesale market,” given the “limited interconnection capacity of the Iberian Peninsula, the high exposure of consumers to wholesale electricity prices, as well as the high influence of gas in setting electricity prices.”

However, the official went on, “EU member states are very diverse in terms of their energy mix, connections and energy systems.” The official recalled that, in a recent analysis, the commission highlighted “risks related to this type of measures at the EU level, including that of increasing demand for gas and increasing subsidised electricity exports to neighbouring non-EU countries” such as the UK or Switzerland.

In addition, the European Commission has already adopted “several measures that have a de facto impact on the coupling of gas and electricity prices … such as the infra-marginal revenue cap that targets excessive profits from energy production and redirects revenues to end users that are generated when the gas price signal creates high prices on the electricity market,” this senior official further recalled, speaking of an “instrument designed to help energy consumers without creating the wrong signals about gas demand.”

In January this year, the commission launched a public consultation, since completed, on reforming the design of the EU electricity market, which aims to better protect consumers from excessive price volatility, facilitate their access to secure energy from clean sources and make the market more resilient. It is due to present its proposal on this matter in mid-March.

In the current European market setup, gas determines the overall price of electricity when it is used, as all producers receive the same price for the same product – electricity – when it enters the grid.

There has been consensus in the EU that this current marginal pricing model is the most efficient, but the acute energy crisis, exacerbated by the war in Ukraine, has prompted discussion about whether this is in fact the case.

Since the EU has been dependent on fossil fuel imports, notably gas from Russia, the current geopolitical context has increased the volatility of electricity prices.

Since mid-May last year, a temporary mechanism has been in place to cap the price of gas in electricity generation on the Iberian Peninsula until the end of May 2023.