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Why is the market set up the way it is?

The European electricity market as we know it today only came into being in 1998, when a new law, the Electricity Supply Act, was passed with the aim to liberalise the market, and the state monopolies were broken. Since then, electricity customers have been able to choose which supplier they want to buy electricity from. At the same time, the market underwent a process of ‘unbundling’ in which ownership of the transmission grids was separated from the producers and suppliers.

In contrast to the EU countries, the electricity market in Switzerland is only partially liberalised. While large-scale consumers can choose their supplier, small consumers and households cannot and remain in the regulated market, where the electricity tariffs – which are based on production costs – are monitored by Switzerland’s Federal Electricity Commission (ElCom). 

This partial liberalisation meant that during most of the past decade, industrial and other large-scale consumers were able to benefit from the extremely low market prices, whilst the consumers could not. However, the tables have turned with the recent price changes, and now it’s the smaller consumers who are benefiting because they are tied to the regulated market and therefore only affected to a limited extent by today’s higher electricity prices. 

As such – although the full opening of the market is provided for in the Electricity Supply Act – such a move would currently not receive sufficient political support.

How did this situation arise? What changes did the creation of the European electricity market bring? And what challenges will Switzerland and its European counterparts have to overcome to ensure a low-carbon electricity supply? We talk about these questions with Michael Wider, Deputy CEO Alpiq, Division Head Switzerland in the interview below,to find out more.



Michael Wider

Deputy CEO Alpiq and Division Head Switzerland

Michael, what did the electricity business look like in the 1990s when you entered the industry? 

The cornerstones of the industry were essentially the same as today – production, cross-border exchange, grids and end customers. The value chain was embedded in a monopoly, so there was no competition and the electricity companies’ activities in the areas of production, grid operation and customer service were determined by concessions and fixed. The 1990s saw modernisation of the electricity companies with the introduction of mobile telephony and personal computers in the early 1990s.

What happened in the years that followed? 

The European Union, which was still in its early years, triggered a wave of economic neoliberalism across Europe to break up monopoly structures and introduce free market practices. Margaret Thatcher, the Prime Minister of the UK at that time, was a strong advocate of this trend and not only liberalised many industries such as railways and electricity, but also privatised many state-owned enterprises. The electricity market was also liberalised in Scandinavia at this time – everything except the grid infrastructure.

What impact did liberalisation have?

There was a clear trend in Europe away from social market economic policies towards free competition – in the expectation that this would lead to efficiency, transparency, price pressure, incentives, and space for innovation. Moves were also underway to create a single European marketplace. These resulted in the creation of the European wholesale market, featuring the first electricity exchanges, and then gradually in the liberalisation of the retail market, with customers being given the freedom to choose their supplier. Digitalisation also began to take hold and shape the electricity market. Seen from today’s standpoint, the impact has been mixed. The price reductions have not materialised, markets have become more complex and, given the strategic importance of energy and electricity, state authorities have repeatedly intervened to distort the market structure. The market will continue to be influenced by huge subsidies for renewables and decarbonisation, which are essential in setting the right course.

The electricity exchanges are often criticised as a platform for speculative trading. Is that justified?

Having an international electricity market makes good sense both physically and commercially – and it also strengthens the security of supply throughout Europe. The only way to organise and maintain this market efficiently is through an exchange. Switzerland is firmly integrated in the European electricity market and – as is often overlooked – this in itself contributes greatly to ensuring our security of supply. I strongly emphasise that a trading platform is not the same as a pool of speculators. If a farmer already sells his potato harvest in spring, is he speculating or just ensuring his income? 

That’s a vivid example – thank you! The electricity exchanges were originally intended as an ‘energy-only’ system based purely on the volume of electricity available, not on the security of supply. Nobody foresaw potential shortages. Looking back, was that a mistake?

It’s easy to be wise after the event. The concept was well thought-out when it was introduced 20 years ago, but the world doesn’t stand still. In the meantime, factors such as massive subsidies, the huge decline in controllable power in Europe, the difficulties in expanding the grid, and the large amount of stochastic power in the grid have all put great pressure on the market. What’s more, the merit order model that has been applied, whereby prices are set by the most expensive plant required to serve demand, has failed to provided investment incentives without subsidies. If you shrink capacity without creating the structures needed to build it back up again, shortages are inevitable in the long run.

What will happen if the current market design remains in place? 

The decision on which market design to adopt in future is taken at a European level and that will be a time-consuming process. Certainly, if we leave it as it is today, it won’t be possible to resolve the shortcomings I’ve just described – above all the fact that you can’t generate investment without subsidies or other assurances.

What are the alternatives?

The discussion about introducing capacity auctions and contracts for differences is nothing new. There is also talk of creating two distinct merit orders to break the correlation between gas prices and electricity prices. There is no one-size-fits-all solution. I’ve been watching with interest the innovative ways that California has been responding to its energy crisis, for example by introducing production auctions. We need to think outside the box here too.

What do you think is needed?

In terms of Switzerland, we definitely need more pragmatism, more courage, and more joined-up thinking. We have taken a number of half-baked measures – be it half-opening the end consumer market, promoting climate neutrality while building gas-fired power plants, stifling promising initiatives because they’re apparently not compatible with Europe, or preaching free market policies while intervening in it repeatedly. This stop-start approach is not getting us anywhere.

If you had three wishes for the electricity market, what would they be?

Firstly, that we quickly install climate-neutral production facilities – because this is what paves the way for a reliable security of supply. Secondly, that the commercial aspects of the electricity market more closely reflect the physical reality again. And thirdly, that those who design the market model, including the politicians and governments across Europe and in Brussels, rely less on ideology and more on facts and figures.