Page 9 - FSUOGM Week 38 2022

FSUOGM SPECIAL COMMENTARY FSUOGM

In the long run, the price from the merit The proposed cap only covers a small portion
order needs to be high enough to cover the full of the large and complex power market
costs of power-generating assets, not only the A single or one power market does not exist.
marginal costs. While the marginal costs cover In fact, power markets are multi-headed-beasts
the fuel costs, they don’t capture capital costs and that consist of many segments which all serve
operational costs. a purpose to keep the physical complex power
The life-cycle cost of electricity (LCOE, or grids working. European power grids are among
Levelised Cost of Electricity) is a measure of the the most reliable grids in the world and power
average total electricity costs of an asset over its users, small to large, take it for granted that
full life cycle. The proposed cap of €180/MWh is power is always available. In liberalised power
sufficient to cover most solar and wind projects markets this can only be done by a complex
without subsidies and even for some projects system of power markets, where vast amounts
with battery storage attached. But the cap does of power are traded within seconds and years in
not cover the full and unsubsidised costs of new advance.
nuclear and hydro projects. These tend to be
very capital intensive and have a history of large The proposed price cap only applies to the
budget overruns. This could pose a problem for day-ahead market
the ‘nuclear renaissance’ that French President The power market is in fact a collection of
Emmanuel Macron recently called for. many complex sub-markets:

Source: ING Research

The proposed price cap only applies to supply is currently hedged at prices well
the day-ahead market in which approx- below the cap (in the range of €30-85/
imately 20-30% of the power is traded. MWh).
So, most of the power is not subject to the
price cap. European power generators, for Utilities tend to pre-sell most of their
example, tend to pre-sell about 80% of their power in future markets at prices lower
future power production in one-year ahead than the cap
future contracts or through Power Purchase Share of power generation sold upfront
Agreements. Hence, most of their revenues through exchanges or purchasing power
won’t be impacted by the cap. Furthermore, agreements and the average power price:

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