Interventions in the EU ETS are not a suitable way of reducing electricity prices

A new analysis carried out by Oeko-Institut shows that interventions in the European Union Emissions Trading System (EU ETS) are not a suitable way of reducing electricity prices. In view of rising energy prices, there is currently a debate on how to reduce electricity costs in Europe. The proposal to exempt electricity generation from natural gas from the EU ETS could lower electricity prices in the short term, but would simultaneously lead to new problems. 

The consequences of intervening in the EU ETS would be fraught with considerable uncertainty and could trigger numerous knock-on effects. For example, gas consumption could rise, gas prices could increase, and electricity imports and exports between EU countries could be thrown out of balance. Furthermore, such interventions could undermine the stability and reliability of the energy policy framework, thereby jeopardising vital investments in the energy transition. In addition, the current turbulence on global fuel markets is leading to rising and volatile electricity prices in the short term. However, an intervention in the EU ETS would only reduce electricity prices in the medium to long term. Therefore, the intended cost reduction would, at best, only be achieved by chance and would likely only be temporary.

Negative effects of exempting natural gas power plants 

Natural gas accounts for around 15 percent of the EU’s electricity generation, but accounts for the largest share of the EU’s fossil fuel-based electricity generation at 57 per cent. Natural gas power plants play a key role in the electricity market, because they often set the price. The analysis focuses on modelling scenarios in which natural gas-fired power generation (either across the EU or only in Italy) is excluded from the EU ETS. It shows that, while these measures may have substantial effects on electricity prices, these effects can vary over time and across regions.

If natural gas power plants in individual countries were excluded from the EU ETS (particularly in the case of Italy), the structures and levels of cross-border electricity supplies would change very rapidly and abruptly. Electricity imports from Italy and emissions from Italian natural gas power plants would rise sharply, thereby giving rise to carbon leakage effects within the European Union. Overall, it is clear that, in view of these consequences, the exclusion of individual groups of emitters such as natural gas power plants is not a useful or acceptable means of limiting electricity costs. 

Recommendation: Structural measures to ease the burden on electricity customers

To reduce electricity costs, the authors recommend structural measures that also make sense in the long term. These include accelerating the energy transition and reducing the number of hours during which natural gas-fired power plants set the price. This can be achieved by increasing generation from renewable energy sources and expanding storage and grids. In the short term, targeted measures can be used to reduce electricity costs for customers, e.g. by decreasing the electricity tax or other levies. These measures take effect immediately, are predictable and reduce electricity prices straight away. They lead to visible and stable price effects. 

Study ‘The effects of removing natural gas power plants from the EU ETS 1‘ by Oeko-Institut