EU aims to curb energy prices

The situation on the European gas and electricity market has worsened dramatically. Prices are exploding as a consequence of Russia's war against Ukraine and the stability of the power supply could be threatened in the coming winter.

For these reasons, European Union energy ministers are meeting on Friday for what the official invitation calls "exchanges of views."

Formal decisions haven't been promised but time is of the essence. The European Commission wants a mandate to prepare interventions in the bloc's electricity and gas markets, with President Ursula von der Leyen announcing this Wednesday that she wants to present a first draft of a regulation containing drastic measures by early next week.

After confidential discussion papers in Brussels were published in the media, von der Leyen spoke to the press on short notice Wednesday to propose five measures against the energy price crisis. She also explained her proposals in person to the EU ambassadors of the 27 member states, a highly unusual step that underscores the seriousness of the situation.

So just what is the EU Commission proposing?

Energy savings

For peak periods of electricity consumption (morning and early evening), EU member states are to make binding commitments to reduce consumption. This is because expensive gas-fired power plants have to be revved up to cover consumption during these times. Von der Leyen didn't give a concrete figure on how big the reductions would be, but in Commission circles there is talk of at least 10%. Member states had already committed to reducing gas consumption by 15% in winter, but only on a voluntary basis. Hungary rejected the measure completely, and it remains to be seen whether all member states will now agree to save electricity.

Capping renewable energy profits to subsidize electricity bills

As a price brake, the EU Commission proposes that companies that generate electricity cheaply from the sun, wind or water have to pay a new levy. This is intended to make up the difference between these sources and gas-generated electricity which, as the most expensive form of electricity on the market, sets prices for producers.

The levy would skim off the greater profits from some types of electricity generation, profits that are only realizable because of the skyrocketing price of gas. These are profits that producers "never dreamed of,” von der Leyen said. The revenue should then be passed on by EU member states to poorer consumers and struggling businesses to subsidize their electricity bills. The current "merit order" system of setting prices by the most expensive kilowatt-hour wouldn't be changed, but profits would be skimmed. The price of electricity would continue to be determined daily by the market on the European power exchange.

A tax on excess profits for oil and gas companies

Companies that have made extremely high profits in recent months as a result of expanding oil and gas prices are to pay a "solidarity contribution," von der Leyen announced. She avoided using the term "excess profits tax," which is seen as controversial by Germany governing coalition. Just how high this "contribution" should be and exactly where it will be spent remains open. But green energy won't be the only target of measures. "Because all energy sources must help to 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 complicated network of short- and long-term supply contracts, options and derivatives can continue to function. The European Central Bank should pump more money into the market, strict trading rules should be relaxed, and some derivatives should be removed, according to a confidential working paper of the Czech presidency. The bankruptcy of an energy supplier in the EU shouldn't lead to a wave of bankruptcies and distress among banks that finance electricity trading, it said. The EU Commission is proposing assistance for ailing utilities with loans or state aid, and the EU rules are to be updated rapidly.

Capping gas prices

The EU Commission is advocating a price cap for what little gas is still being supplied from Russia. This would mean that Russian President Vladimir Putin could no longer make ever increasing profits. The EU now gets only 9% of its natural gas from Russia, compared to 40% a year ago. Von der Leyen is throwing caution to the wind over Putin's threat to stop supplying gas if an EU price cap is introduced. We should not be impressed, she said, adding that 13 EU member states already no longer receive any gas from Russia. She also didn't rule out limiting the price of liquefied natural gas (LNG) supplied from the United States or the Middle East, though the EU must remain competitive with other regions that also purchase LNG.

Will EU member states play along?

Von der Leyen seems convinced that these measures could be implemented quickly and without much resistance. "The skimming of profits as an emergency instrument, in the short term and in a time 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 Democratic Union's parliamentary group in the Bundestag, Germany's lower house of parliament.

However, the introduction of these measures would require Spain, Italy and Greece to change their systems again. They had already introduced an excess profits tax for energy companies and, in some cases, price caps. This tax would have to be abandoned because an EU-wide levy for cheap power generation would have the same effect. German Chancellor Olaf Scholz has already signaled approval for such a levy. High electricity prices couldn't be justified, he said in a speech in Prague on August 29, adding that it was a matter of targeted relief for citizens. A few days later, Scholz stressed that he was in favor of a rapid EU-wide regulation, and that Germany was also prepared to go it alone if necessary. But French President Emmanuel Macron is also said to approve of the EU Commission's proposals in principle, reports the French news outlet Le Monde.

 

Should electricity still be traded EU-wide?

The EU Commission, the Czech Council Presidency and experts from the Brussels-based economic think tank Bruegel all favor maintaining the relatively deregulated European electricity market, on which electricity is bought and sold across borders. This is the only way to ensure supply security in all member states, they say. Plus, electricity generated on an exclusively national basis would be even more expensive than it is currently because each country would need a fossil-fuel power plant park for base and peak loads.

France's current power supply would collapse without cross-border trade because the country imports 12% of its electricity from Germany and Italy due to defective nuclear power plants of its own. But in 2021, France was still a major exporter of electricity, and is expected to be again soon. The general appeal is to connect as many power plants as possible to the grid to increase supply. This also applies to Germany's last three nuclear power plants in operation, only two of which the Economy Minister Robert Habeck, of the environmentalist Greens, wants to keep on standby for emergency operation.

Hungary, the wild card

A big unknown is how Hungary will respond to new policies being formed amid the energy crisis. Prime Minister Viktor Orban is the only EU head of government who has agreed to a special price for extensive Russian gas supplies with the Kremlin. As a result, the price of electricity in Hungary has fallen compared to last year, while it has quadrupled in the Baltic states, for example.