EU power markets could move to a capped inframarginal price formation under upcoming EU reforms, according to a leaked non-paper that details potential market reform strategies.
As part of its solution for a new market model, the European Commission is considering a price cap for inframarginal power generation technologies — those that do not typically set the marginal price — which includes nuclear, lignite and most renewables — except for some types of hydropower, biomass and biogas. The cap would prevent low-carbon plants from receiving prices determined by high gas costs. It would be applied after the clearing of the day-ahead market auction and could be mandatory for all EU member states, optional or even remain as a recommendation. The surplus revenue calculated for the inframarginal plants would be distributed among power consumers. But this measure could push power generators and trading companies back into the over-the-counter market, where the revenue cap does not apply, potentially threatening EU market coupling schemes.
The measure echoes calls from several European governments — including France and Belgium — to decouple power prices from gas. But the commission recommends not proceeding with other proposals, such as a wholesale power price cap, a model following the Iberian price cap — where the cost of gas used in power generation is capped — or even a full market suspension, as they present risks for security of supply and excessive costs.
But the commission noted that introducing the inframarginal cap would be incompatible with parallel excess profit taxation schemes, which would have to be abolished.
And revenues received by member states through the inframarginal price cap could be used to implement customer support measures, in particular regulated tariffs. "There is no evidence that price regulation is more effective than direct support," the commission added.
Another pillar of the commission's plan is a co-ordinated cut in power demand, which would be done by demand-reduction tenders providing financial compensation for a decrease in consumption specific sectors.
The recommendations come several days after commission president Ursula von der Leyen said the power market design should be reformed, as it was "developed for different circumstances".
As a next step of the market reform process, the commission is considering organising a technical seminar with experts on the components of the package and their implementation in September.
