Merit-Order adaptions effectively put the brakes on electricity prices
Key advantages of an adapted electricity market design
- Significant and rapid relief effect for all customers of electricity
- No fundamental change of the existing electricity market model necessary
- Positive impact on forward and OTC contracts
- No need to use taxpayers money
- Effective safeguarding the future of the economy in Germany and the European Union
Companies in the European Union have been facing an unprecedented increase in energy prices for months. The main reason for this is the significant decline in Russian gas supplies and missing short-term options allowing for a replacement of these supplies on the world market, which in combination have led to an enormous increase in prices. The current electricity market design means that high gas prices – even though this energy source only contributes e.g. to around 10 percent of the net electricity generation in Germany – determine the overall price on the electricity market. This leads to skyrocketing electricity prices for consumers and extensive windfall profits on the part of some energy companies. This imbalance must be resolved in the interests of a stable electricity market that is economically viable for all participants.
The goal must therefore be to quickly and effectively decouple the pricing of electricity from the prices of imported energy sources, especially natural gas, without profoundly interfering with the established market mechanisms (merit order model) and at the same time maintaining incentives to save energy.
This way, electricity prices can be reduced for all market participants and the predictability can be improved.
Core components and operating mode of the adapted merit-order system The requirements for a functioning electricity price brake are to reduce electricity prices quickly and effectively for all consumers, to maintain the incentive for energy savings, and to provide a stimulus for increased expansion of renewable energy.
The model originally proposed by Siempelkamp Giesserei GmbH and supported by the German Mittelstand Association BVMW offers the great advantage of combining these requirements in the best possible way. The model is based on a decoupling of the electricity price from the gas price and provides for a simple and practicable adjustment of the existing merit order system for electricity trading.
The gas-induced price extremes are practically capped, so they do no longer massively increase the general price level of electricity. The costs for the small but very expensive share of electricity produced by natural gas will be financed via a levy. Overall, this will make electricity significantly cheaper again.
The proposed adjustment mechanism can be put into effect in two steps:
In the first step, a so-called synthetic electricity price will be defined for electricity produced from natural gas, based on historical average values, for example for the years 2019 to 2021.
This historical average price will be increased by a surcharge to be determined politically. This surcharge is intended to ensure that an additional incentive to save energy is created, despite the reduction in price. At the same time, the surcharge will provide a stimulus for the further build-up of renewable energy capacities.
For this synthetic electricity price to take effect, gas-fired power plants must be compensated in a second step for the difference between the synthetic electricity price and the regular market price. To this end, an import levy shall be created, which shall be distributed among all consumers by means of a surcharge to be determined per kilowatt hour consumed. The levy would ensure that electricity prices fall across the board. Thus, the new electricity price level plus the levy would be significantly below current market prices… read below full outline…