Electricity market: the liberalization of the 1990s is a failure

20. September 2022
-IAM, News

Hugues Chevalier, Economist

Following Russia’s invasion of Ukraine, energy prices have soared in Europe. The price increase on the power wholesale market is largely due to the increase in gas and in CO2 prices on the European carbon market. Indeed, in Europe, part of the electricity is produced from fossil fuels: 20% from gas and 13% from coal. Any increase in the price of gas is therefore transmitted to the electricity market through the spot market mechanism, which only takes into account the cost of the last power station called (marginal cost principle), in most cases a gas power station. As winter approaches, there are fears of an electricity shortage and an explosion in costs for consumers, even though several countries, such as Switzerland, do not depend on gas-fired power stations for their supply. This absurd situation stems from the “liberalization” of the market by the European Union in the 1990s, which imposed a wholesale market without control by a public body, even though this market is not a free market. Indeed, this market is oligopolistic on both the production and transport sides. Why, in fact, should French or Swiss consumers have to pay for the “energy mix” choices of neighboring countries that have chosen gas and coal to produce electricity, even though the price of electricity production in these respective countries has not risen? This liberalization of the electricity market has already led to the near-collapse in previous years of “virtuous” and sustainable producers