As European economies and households reel from rising energy costs due to the double whammy of heat waves and reduced gas supply from Russia, politicians, and regulators are missing a unique opportunity to transition towards low-carbon renewable alternatives. This is the main argument of a new research paper, published jointly by the Institute for New Economic Thinking (INET) and the University College of London’s Bartlett Institute for Sustainable Resources.
The working paper titled “Navigating the Crises in European Energy: Price Inflation, Marginal Cost Pricing, and Principles for Electricity Market Redesign in an Era of Low-Carbon Transition” shows that current electricity pricing procedures based on marginal cost pricing mean that increases in the price of gas drive up the returns of all producers, whether they use natural gas or not.
According to the study’s author, Michael Grubb, Professor of Energy and Climate Change Policy at the University College of London, “fossil fuels set the electricity price for most of the time, at levels which are now much higher than the energy cost of at least half the system (recent renewables and existing nuclear) – so the price of electricity is way above the average cost of generating it.”
Thanks to innovations, renewable energy is now much cheaper than in the past. A redesign of the pricing process for electricity would, accordingly, result in a far better price and more climate-friendly power generation.
Lower-cost renewables, which are priced on long-term contracts instead of marginal cost pricing and under far less volatility than fossil fuels, would offer “an opportunity that could be seized by substantial changes in electricity market design,” writes Professor Grubb.
The study concludes by outlining principles for restructuring the European energy market so as to increase the use of renewable energy sources.
