Draghi's Energy Diagnosis Is Right. His Cure Depends on Contracts, Grids and Gas Buying Power
Mario Draghi's report on the future of European competitiveness, published on 9 September 2024, put energy prices at the centre of Europe's economic problem. The former European Central Bank president argued that European companies face electricity prices two to three times those in the United States, and natural gas prices four to five times higher, and that this gap is one of the main reasons European industry is losing ground. He called for decoupling the remuneration of renewable and nuclear generation from the volatile price of gas, faster deployment of renewables and grids, simplified permitting, and a more coordinated approach to buying gas, including joint procurement and long-term contracts with diversified suppliers.
Our view is that the energy chapter is the most practical part of the report and that its diagnosis is correct. Europe's high prices are not mainly the result of its market design, but of its dependence on imported gas at the margin and its slow pace in building the cheaper alternatives. In Europe's electricity markets the price in each hour is set by the most expensive plant needed to meet demand. He is careful, however, not to call for the abolition of marginal pricing.
The difficulty is that long-term contracts are still the preserve of large, creditworthy companies. Draghi's report points to the need for guarantees and aggregation mechanisms that let smaller buyers participate. On gas, Draghi argues for using the EU's collective weight as the world's largest gas importer to secure better terms, through joint purchasing, reduced reliance on spot markets and long-term contracts with reliable suppliers. The report also notes that taxes and levies on energy vary widely and in many cases weigh more heavily on electricity than on fossil fuels. Draghi has given the energy debate a clear economic frame: high energy prices are a competitiveness problem, and solving them requires investment and coordination at a European scale.