Ets, so the bill decree breaks a taboo
For the first time, a large EU country is trying to break the mechanism by which the cost of CO₂ embedded in gas-fired generation is automatically passed on in the wholesale price of electricity, generating large intramarginal rents
When the Financial Times devotes attention to a national measure on the European electricity market, it means that something relevant is moving. The bill decree with which the government intervenes in the electricity market does indeed break a taboo: for the first time, a large EU country is trying to break the mechanism by which the cost of CO₂ embedded in gas-fired generation is automatically passed on in the wholesale price of electricity, generating large intramarginal rents.
The starting point is well known. In the European model based on the System Marginal Price, when gas-fired combined cycles are the latest technology needed to meet demand, their cost determines the price for all energy produced. Even if gas generates less than half of the electricity, its cost - including CO₂ - ends up setting the price for a much larger share of the market. In this way, the carbon price determined by the Ets is in fact transmitted to the entire electricity price.
The decree intervenes in this mechanism by reimbursing thermoelectric producers a part of the CO₂ costs so that they are not fully incorporated into market offers. The aim is to reduce the marginal price and thus the wholesale price of electricity. According to government estimates, the effect could be in the order of EUR 6-9 per megawatt hour.
The political merit of the initiative is that it has made explicit a discussion that had long remained implicit in Europe: the way in which the CO₂ price is transmitted to the electricity market can produce distribution effects that are much broader than originally imagined.
To understand the point, it is necessary to recall the context in which the Ets came into being. At the beginning of the 2000s, the electricity market was dominated by technologies with prevailing operating costs - coal and gas - where the price was mainly determined by variable costs. In an OPEX-driven system, introducing a CO₂ cost was economically consistent: it steered dispatch and incentivised the development of low-emission technologies. It is also thanks to this mechanism that Europe has significantly reduced emissions from the electricity sector over the past two decades.
