The European Union is preparing an emergency plan to cap gas prices or separate electricity prices from rising gas costs. We are also undertaking long-term reforms aimed at ensuring that electricity prices reflect cheaper renewable energy.
The energy ministers of the EU countries will meet on September 9th to discuss how to reduce the strain on businesses and households from rising energy prices as a matter of urgency.
Fueled by record gas prices, European power costs surged last year as Russia curbed supplies to Europe.
European governments have accused Moscow of using energy as blackmail in retaliation for the West’s aid to Ukraine after Russia’s invasion. Russian gas giant Gazprom blames the cuts on Western sanctions and technical problems.
It took 20 years for cross-border trade in energy commodities between Member States to emerge and become established, so changing the EU’s 27-state energy system is complex and potentially long-lasting. But policy makers are racing to find short-term solutions.
Here are some reasons why Europe is considering reforming its energy markets, and what it might entail:
Why are electricity prices linked to gas prices?
In the EU energy system, wholesale electricity prices are set by the last power plant needed to meet overall demand.
Wind farms, nuclear plants, coal plants, gas plants, and all other plants enter the electricity market, with the cheapest sources coming in first, followed by more expensive sources such as gas. Continue. Gas plants often set their prices on this system.
The idea is that cheaper renewable generators offer a greater profit margin, as all generators sell their power at the same price. This will serve as a stimulus for Europe to invest in renewable power generation, which is needed to meet its climate change goals.
But countries such as Spain say the system is unfair because cheap renewable energy is sold to consumers at the same price as more expensive fossil fuel-based electricity.
Gas prices are soaring as Russia cuts exports to Europe and fierce global competition for non-Russian gas. The impact has increased the price of producing electricity from gas in Europe, pushing up overall electricity prices.
Germany’s 2023 benchmark electricity contract soared to a record high of €1,050 per megawatt hour (MWh) in late August, 14 times higher than a year ago.
Other factors pushing up electricity prices include problems with French nuclear power plants and a severe drought in Europe that has hampered hydropower output and impacted coal supplies.
How could the EU change energy prices?
EU Secretary-General Ursula von der Leyen said on Wednesday that the European Commission would propose capping the earnings of non-gas-fired generators.
The surge in electricity prices has led to greater returns for cheaper running cost non-gas generators, such as wind farms and nuclear power plants. invoice.
European Commission President Ursula von der Leyen will hold a press conference on energy on Wednesday. Photo: Kenzo Tribouillard/AFP via Getty
A draft of the commission’s proposal, seen by Reuters, said the ceiling would be €200 per megawatt hour, less than half the current wholesale electricity price in Germany, and could be used for wind, solar, biomass and nuclear power plants. stations, coal power plants among the affected people.
The measure will not have a direct impact on prices in the electricity market traded on European exchanges, as price caps will be applied and excess earnings will be recovered after electricity transactions have been settled, the draft said. Drafts are subject to change prior to publication.
The Czech Republic, which holds the rotating presidency of the EU, also offers options.
This includes price caps on imported gas from certain countries, price caps on gas used to generate electricity, or the temporary exclusion of gas power plants from the current EU system of setting electricity prices. .
EU energy ministers are expected to discuss various options when they meet on Friday. A new policy or his EU law requires approval from EU countries.
The idea of ​​capping gas and electricity prices has long been supported by countries such as Spain and Belgium, but is now backed by countries that were initially reluctant, such as Austria and Germany. France is he one of the states favoring action to separate gas and electricity prices.
Von der Leyen also said the European Commission would propose a price cap specifically for gas from Russia. The move is aimed at cutting the revenue Moscow earns from fuel sales.
However, some countries are alarmed, saying that there is still a risk that Russia will retaliate by halting the decline in supplies to Europe altogether.
Another option is for the government to cap gas prices and pay gas companies the difference between the cap price and a higher market price.
Countries such as Germany and the Netherlands have so far argued that it would effectively subsidize fossil fuel power generation with public money and would rather spend it transitioning to cheaper, cleaner energy.
The Czech proposal also includes temporarily limiting power trading on European exchanges to intraday and daily trading.
What are the potential drawbacks?
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Russia’s Gazprom maintains a gas pipeline to Germany quickly …
High gas prices provide financial incentives for industries and households to reduce their gas consumption. Governments are trying to encourage behavioral changes to ensure we have enough fuel to get us through the winter.
Capping gas prices would limit incentives to do so and could even encourage gas use if governments are required to develop policies to reduce consumption, critics say.
Some analysts have suggested that rather than a hasty market overhaul, financial aid aimed at low-income households and businesses hit hardest by inflation is a better option.
Others have discussed how governments can limit the cost of gas-fueled electricity in a way that does not encourage gas plant owners to produce less electricity when countries urgently need it. Problem remains.
