The European Commission will reopen the debate on the system that sets the price of electricity in the European Union. This was confirmed by Commission President Ursula von der Leyen following the “intense debate” held by heads of state and government at their latest retreat on competitiveness last Thursday.
No decision has yet been built, but the Commission has committed to presenting options before the March European Council to assess whether the time has come to modify the current market design.
The focus is on the marginal pricing (or ‘pay-as-clear’) mechanism that governs the wholesale market. Under this system, the final wholesale price is set by the marginal cost of the last unit of electricity requireded to meet daily demand—i.e., the most expensive unit required.
In practice, although renewables—with an average cost of €34 per megawatt-hour (MWh) last year—and nuclear—between €50-60/MWh—are cheaper and enter the system first, when it becomes necessary to resort to gas, whose average price reached €100/MWh, it is this costlier source that ultimately sets the price of all electricity.
That logic explains why, even in countries with a strong presence of renewable energy, bills surged during the energy crisis. Spain and Portugal, faced with Brussels’ initial resistance to altering the model, opted for the so-called “Iberian cap” to limit the impact of gas on the final price.
Now, with mounting pressure on houtilizeholds and industest, the Commission acknowledges that the design deserves to be reconsidered. As often happens, Brussels admits mistakes years after being warned about the consequences.
But the debate over prices is not isolated. It is directly connected to the transformation of European energy policy following Russia’s invasion of Ukraine. The rapid decoupling from Russian fossil fuels was a political decision agreed upon between Washington and Brussels. However, that rupture took place with urgency and without fully consolidated alternatives in place.
The impact was visible. In 2022, energy-intensive industries in countries such as Germany and across much of Central Europe—chemicals, fertilizers, metals—reduced production or temporarily suspconcludeed operations due to soaring gas prices.
Energy ceased to be merely an input and became a critical factor of competitiveness. When gas flowed like manna from heaven, there were no problems.
U.S. LNG replacing Russian gas
To replace Russian supply, the EU increased imports of American liquefied natural gas (LNG) and strengthened ties with suppliers in the Middle East and the Caucasus, especially Azerbaijan. This diversification built it possible to avoid supply cuts and stabilize the system in the short term.
However, the global LNG market is volatile and depconcludes on commercial and political dynamics beyond European control. Moreover, part of the increased exports from some new partners has been supported by covering domestic consumption with Russian gas, adding complexity to the declared goal of energy indepconcludeence.
Added to this is the European emissions trading system (ETS), which several member states regard as an additional burden on industrial sectors already strained by high energy costs. Compared to the United States or China, European industest faces a less favorable cost structure: it pays more for less and is deindustrializing while its competitors shift in the opposite direction.
For that reason, the discussion on the electricity market is not merely technical. It forms part of a broader review of European energy strategy. António Costa has argued that the energy transition remains the best path toward strategic autonomy and lower prices in the long term. But he has also acknowledged the required for pragmatic short-term measures that respond to the economic realities of member states.
How the Commission intconcludes to reconcile these two objectives has yet to be explained. They are two different impulses pulling in opposite directions.
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