EU plan to intervene in energy markets – ‘There are limits’ to what it can achieve

An emergency intervention in European electricity markets may lower prices but will not protect the region’s economy from the knock-on effects of a historic energy crisis, according to the Commission.

The European Union is working on measures to curb electricity costs as Russia cuts shipments of natural gas needed to power power plants weeks before the start of the heating season. The Commission is considering a package of measures that includes a reduction in electricity demand and a ceiling on the prices of energy produced from renewable sources (RES), nuclear plants and coal-fired, according to a document obtained by Bloomberg.

While intervention tools “may contribute to mitigating the impact of the energy crisis, in particular for certain categories of consumers, they will not restore energy prices to pre-crisis levels or eliminate the significant effects of the crisis on both inflation and the European economy as a whole,” the Commission states in the said document. “Given the economic fundamentals affecting energy markets right now, we don’t see any type of market intervention that would have that effect in the near term.”

European gas prices have retreated from record levels in recent days, but are still more than four times higher than a year ago. Electricity prices also remain well above normal levels.

The EU has already agreed to look for alternative sources to natural gas, boost the shift to renewables, strengthen natural gas storage requirements and set voluntary demand reduction targets to avoid winter blackouts.

As European governments continue to come under pressure to act, energy ministers are scheduled to discuss intervention options at an emergency meeting on September 9. The Czech Republic, which holds the rotating EU Presidency, is set to submit its own proposal. Jozef Sikela, the country’s Minister of Industry and Trade, proposed earlier this week to put a cap on the price of natural gas used to generate electricity.

The options proposed by the Commission are “a much more sensible approach than putting a cap on the cost of natural gas built into electricity prices,” said Fabian Ronningen, energy analyst at Rystad AS.

The Commission states in the document that short-term intervention to contain electricity prices would work best as a combination of three factors:

– Decrease in demand based on a mandatory gas demand reduction model included in a winter preparedness regulation agreed by member states in July

– Price limit for energy production technologies other than natural gas, whose operating costs are lower than those of plants using natural gas.

– Price cap revenue – essentially one extraordinary tax – which would help finance retail price interventions.

To reduce energy demand, governments could invite industrial consumers to bid on how much they would be willing to pay to reduce consumption. Households could also receive incentives to limit energy use, according to the paper.

Capping energy prices from renewables, nuclear or coal could be either mandatory for all EU members or optional and could be more easily implemented in the day-ahead futures market.

Limiting the revenue of electricity producers would then provide additional funds for state budgets, which could be used to reduce the size of consumers’ energy bills through regulated tariffs, direct income support or reduced levies.

“The introduction of such a ceiling would not be compatible with the parallel systems of taxation of excess profits, which should be abolished,” the Commission said.

The Commission also recommended against pursuing options such as the complete suspension of the wholesale electricity market, the introduction of a ceiling on wholesale electricity prices and the extension of a price cap mechanism introduced in Spain and Portugal across the EU.

Intervention measures could be proposed either by the Commission in the form of recommendations or in the form of legislation that would allow governments – but not oblige them – to intervene in the market. The third option would be to mandate all member states to intervene.

According to EU diplomats, the Commission is going to discuss the options with experts from the member states at a meeting on September 7.

“In general it makes sense, but the devil is definitely in the details: how exactly can you channel those profits?” said Hanns Koenig, CEO of Aurora Energy Research. “Prices are certainly not going to return to the levels they were two or three years ago, but the redistribution of profits to energy producers is expected to allow governments to significantly subsidize the energy costs of households and businesses.”