The situation in the European gas and electricity market has deteriorated dramatically. Russia’s war against Ukraine has resulted in prices exploding and could threaten the stability of electricity supplies in the coming winter.
For these reasons, EU energy ministers are meeting on Friday, which the official invitation calls an “exchange of views”.
Formal decisions are not promised but time is of the essence. The European Commission seeks a mandate to prepare interventions in the bloc’s electricity and gas markets, with President Ursula von der Leyen announcing Wednesday that it intends to present the first draft of the stringent-measures regulation early next week.
Von der Leyen spoke to the press on Wednesday at short notice to propose five measures against the energy price crisis, after a confidential discussion paper was published in the media in Brussels. He personally briefed the EU ambassadors from the 27 member states about his proposals, a highly unusual move that underscores the gravity of the situation.
So what is the EU Commission proposing?
For peak periods of electricity consumption (morning and evening), EU member states have to make binding commitments to reduce consumption. This is because expensive gas-fired power plants have to be revived to cover consumption during these times. Von der Leyen gave no concrete figures for how big the cuts would be, but there is talk of at least 10% in commission circles. Member states had already committed to reducing gas consumption by 15% in winter, but only on a voluntary basis. Hungary rejected the measure outright, and it remains to be seen whether all member states will now agree to save electricity.,
Limiting renewable energy benefits to subsidize electricity bills
As a price break, the EU Commission proposes that companies that generate electricity cheaply from the sun, wind or water will have to pay a new fee. It aims to differentiate between electricity generated from these sources and gas, which sets prices for producers as the most expensive form of electricity in the market.
The levy will reduce the excess profit from certain types of electricity generation, a benefit that can only be achieved due to the skyrocketing price of gas. “These are benefits the producers never dreamed of,” von der Leyen said. The revenue must then be passed on by EU member states to poor consumers and struggling businesses to subsidize their electricity bills. The current “merit order” system of setting prices by the most expensive kilowatt-hours would not be replaced, but profits would be reduced. The price of electricity will continue to be determined daily by the market on the European Power Exchange.
Tax on excess profit for oil and gas companies
Companies that have made huge profits in recent months as a result of expanding oil and gas prices are to pay a “solidarity contribution”, von der Leyen announced. It avoided using the term “additional profit tax”, which is seen as controversial by the Germany governing coalition. How high this “contribution” should be and where it will be spent remains open. But green energy will not be the only goal of the measures. “Because all energy sources should help overcome this crisis,” she said.
Ensuring a stable electricity market
Record electricity purchase prices and dwindling offers pose a real risk to supply, the Czech presidency of the EU has warned. The market needs more liquidity so that the complex network of short and long term supply contracts, options and derivatives can continue to function. According to a confidential working paper from the Czech presidency, the European Central Bank should pump more money into the market, relax strict trading rules, and remove some derivatives. The bankruptcy of an energy supplier in the EU should not lead to a wave of bankruptcies and crisis among banks that finance the electricity trade, it said. The EU Commission is proposing aid for sick utilities with loans or state aid, and EU rules are to be updated rapidly.
capping gas prices
The EU Commission is advocating for a price cap for how little gas is still being supplied from Russia. This would mean that Russian President Vladimir Putin cannot make any more profits. The EU now gets only 9% of natural gas from Russia, compared to 40% a year ago. Von der Leyen is throwing caution to the wind over Putin’s threat to cut off gas supplies if an EU price cap is introduced. We should not be affected, she said, given that the 13 EU member states don’t already get any gas from Russia. It also did not rule out limiting the price of liquefied natural gas (LNG) supplied from the United States or the Middle East, although the EU must remain competitive with other regions that also buy LNG.
Will EU member states play together?
Von der Leyen seems confident that these measures can be implemented quickly and without resistance. “The skimming of profits, in the short term and as an emergency instrument in times of crisis, has a legal basis at the European level,” von der Leyen said a few days ago at a closed-door meeting of the conservative Christian Democrats. The parliamentary group of the Union in the Bundestag, the lower house of the Parliament of Germany.
However, the introduction of these measures would require Spain, Italy and Greece to revamp their systems. He had already introduced an additional profit tax and, in some cases, price cap for energy companies. This tax would have to be dropped as an EU-wide levy for cheap electricity generation would have the same effect. German Chancellor Olaf Scholz has already indicated approval for such a levy. High electricity prices cannot be justified, he said in a speech in Prague on 29 August, saying it was a matter of targeted relief for citizens. A few days later, Scholz insisted that he was increasingly in favor of EU-wide regulation, and that Germany was ready to go it alone if necessary. But French President Emmanuel Macron is also said to have given in-principle approval to the EU Commission’s proposals, reports the French news outlet. le monde,
Should electricity still be traded EU-wide?
Experts from the European Union Commission, the Czech Council Presidency and Brussels-based economic think tank Bruegel are all in favor of maintaining a relatively controlled European electricity market on which electricity is bought and sold. This is the only way to ensure supply security in all member states, he says. In addition, electricity generated exclusively on a national basis would be even more expensive than currently because each country would need to park fossil-fuel power plants for base and peak loads.
France’s current electricity supply would collapse without cross-border trade as the country imports 12% of its electricity from Germany and Italy due to its own faulty nuclear power plants. But in 2021, France was still a major exporter of electricity, and is expected to be again soon. The general appeal is to connect more power plants to the grid to increase supply. This also applies to Germany’s last three nuclear power plants, of which only two environmentalist Greens economy minister Robert Hebeck wants to be put on standby for emergency operations.
Hungary wild card
A big unknown is how Hungary will react to new policies being put in place amid the energy crisis. Prime Minister Viktor Orban is the only EU head of government to have agreed with the Kremlin a special price for extensive Russian gas supplies. As a result, the price of electricity in Hungary has fallen over the past year, while it has quadrupled in the Baltic states, for example.