Germany ponders new market design to decouple power price from gas price – media

The economy and climate ministry is pondering a new power market design for Germany that decouples electricity prices from gas prices in response to the current turmoil on energy markets exacerbated by Russia’s war on Ukraine, reported Handelsblatt. A ministry spokesperson told the newspaper that a “groundbreaking reform” is being planned that would shield power customers from rising gas prices, as households and businesses alike increasingly use electricity-based solutions as alternatives to fossil-fuel powered technology. The general merit-order principle, by which the power plant with the most expensive marginal costs - often gas power plants, especially with high prices for the fuel - determine the market price for electricity, should remain in place. However, the ministry would aim to get rid of the associated problems arising for power customers. “Excessive profits” stemming from the rule should be redistributed to customers, the spokesperson said. Gas-fired power plants are often the last technology added to Germany’s power mix when demand is high to balance the grid, thereby setting the power price for customers at the time. Economist Veronika Grimm, member of the government’s economic advisory council, said the reform is coming at the wrong moment. “It’s not a good idea in this situation with many existing problems to also create regulatory uncertainty by questioning the power market design,” Grimm told Handelsblatt.

While the rapid price rise for natural gas in the wake of Russia's attack on Ukraine has so far has dominated headlines, a spill-over to the electricity market has happened already and could increase in the next months, observers have warned. To a large degree, price hikes for electricity are also believed to be driven by “sheer panic,” which is why mechanisms to restore trust in market stability could help prevent prices from spiking further.