Page 11 - FSUOGM Week 38 2022

FSUOGM SPECIAL COMMENTARY FSUOGM

above the cap of €180/MWh for months ahead but important moments that the system needs
through in the futures market or through a them. Hence, the business case of investing in
purchasing power agreement (PPA). Liquidity backup power is built on high and flexible pric-
in the important day-ahead market needs to be es, albeit for short periods of time. This form
monitored closely in order to keep this impor- of policy intervention introduces a regulatory
tant part of the power market functioning. risk for the business case: a risk of governments
intervening when prices are high. This might
5. Interference with shorter-term power make investors wary to provide finance for
markets (flex-market) much-needed backup capacity.
European power grids increasingly face con-
gestion problems as the share of wind and solar 9. Legal risk
power increases. Batteries can be a solution, Will this policy intervention trigger lawsuits
both large-scale batteries and homesize batter- and hold up in court? It is not uncommon that
ies. The big question is to what extent the €180/ major changes in market design are taken to
MWh revenue cap in the day-ahead market is court or that parties will call for ‘force majeure’
high enough to spur growth in battery capacity, under existing contracts. This is not something
for example by combining solar panels and wind we can assess as economists, but it is likely that
turbines with batteries (so-called co-location market players will reassess their legal risk pre-
business models). miums in the business case for renewables.
6. Profitability of energy providers 10. Cost of capital and investor return
In an earlier report published in June 2022, we If regulatory and legal risks are deemed sizable,
concluded that a price cap can be a game chang- investors will require a higher return on their
er for European utilities and their profitability. investment for low carbon and/or fossil fuel
As a result, utilities have been outspoken about power generation. This might impact the high
their scepticism regarding price caps. Price caps ambitions of governments to solidify, extend
are intended to minimise the windfall profits and transform European power systems and
of utilities and to provide governments with grids. This energy crisis calls for an even faster
a revenue source to compensate households speed of the energy transition. Utilities and in-
and companies for high energy bills. But they vestors are needed to investbns of euros. They
should not reduce the profitability of utilities as will only do so as long as the risk-return profile
that will limit the much-needed and increasing is acceptable.
amount of investments in the energy transition. All in all, price caps sound appealing but in
practice they are hard to implement and not
7. Implementation risk without potential drawbacks. Since the State
The aim of this market intervention in the mer- of the Union speech, we know the price cap is
it order of the day-ahead market is to provide aimed at a specific segment of the power mar-
short term relief in European power markets. ket, but many details have to be worked out. EU
Will it be implemented quickly enough to pro- energy ministers will meet again on 30 Septem-
vide relief this winter? History is not supportive ber, so more details are expected in the coming
as previous energy market reforms took years weeks.
to be implemented. In that respect, a timeline of
a couple of months seems ambitious but would
mean that it is implemented at the end or after Gerben Hieminga is a Senior Sector Economist
the winter period when energy prices are like- with ING. Nadège Tillier is Head of Corporates
ly to be high. On the other hand, history also Sector Strategy at ING. This note first appeared on
shows that policy interventions can be imple- ING’s THINK.ING portal here.
mented quite fast in a crisis.
Content Disclaimer: This publication has been
8. Regulatory risk prepared by ING solely for information purposes
As more renewables enter the power system, irrespective of a particular user's means, financial
gas and coal-fired power plants become in- situation or investment objectives. The informa-
creasingly important to act as a backup. In Eu- tion does not constitute investment recommenda-
rope’s predominant energy-only-markets gen- tion, and nor is it investment, legal or tax advice
erators with gas and coal-fired power plants are or an offer or solicitation to purchase or sell any
usually not paid to stand idle for the short term financial instrument. ™

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