An emergency intervention in European power markets may lower prices but won’t protect the region’s economy from spillover effects of a historic energy crunch, according to the bloc’s executive arm.
(Bloomberg) — An emergency intervention in European power markets may lower prices but won’t protect the region’s economy from spillover effects of a historic energy crunch, according to the bloc’s executive arm.
The 27-nation European Union is devising measures to curb electricity costs as Russia crimps shipments of natural gas needed to fuel generation plants just weeks before the heating season commences. The European Commission is considering a package of measures including a power-demand reduction and price caps on renewables, nuclear and coal, according to a policy note seen by Bloomberg News on Thursday.
While the intervention tools “can help to mitigate the effect of the crisis, in particular as regards certain consumer categories, they will not bring energy prices back to pre-crisis levels or remove the significant effects of the crisis on both inflation and the European economy as a whole,” the commission said in the note. “Given the economic fundamentals effecting energy markets at the moment, we do not see any type of market intervention that would have such an effect in the short term.”
European natural gas prices have declined from a record in recent days but still are more than four times higher than a year ago. Electricity prices also remain well above normal levels.
The EU already has agreed to seek alternative sources for gas, boost reliance on renewables, bolster gas-storage requirements and set voluntary demand-reduction targets to help survive the coming winter without blackouts.
As European governments come under intensifying pressure to act, energy ministers are scheduled to discuss intervention options at an emergency meeting on Sept. 9. The Czech Republic, which holds the EU rotating presidency, is set to put forward its own proposal. Jozef Sikela, the country’s industry and trade minister, earlier this week suggested a cap on the price of gas used for power generation.
The options floated by the commission are “much more sensible approach than capping the cost of gas that’s incorporated into power prices,” said Fabian Ronningen, a power analyst at Rystad AS.
Europe’s Emergency Power Plan: The Options and Challenges Ahead
The commission recommended in its policy note that short-term intervention to stem power prices would work best as a combination of three components:
- power-demand reduction modeled on a mandatory demand cut for gas included in a winter preparedness regulation agreed by member states in July
- a price limit for power-generating technologies other than gas, whose operating costs is lower than that of gas-fired plants
- revenues from the price limit — effectively a windfall tax — that would help finance retail-price interventions
To reduce power demand, governments could invite industrial consumers to submit bids on how much they’d be paid to lower consumption. Households also could receive incentives for curbing energy use, according to the note.
A price cap for power from renewables, nuclear or coal could be either mandatory for all EU members or optional, and would most easily be applied to the day-ahead market. The limit on revenues for power generators would then provide extra finances for state budgets that could be used for lowering consumers’ energy bills via regulated tariffs, direct income support or reduction of levies.
“The introduction of such a cap would not be compatible with parallel excess profit taxation schemes, which would have to be abolished,” the commission said.
The commission also recommended not to pursue options such as a full suspension of the wholesale electricity market, introduction of a ceiling on wholesale power prices and extension of a price-capping mechanism introduced in Spain and Portugal into the entire EU.
Read: Spaniards Are Paying 67% Less Than Germans for Power in Market
The intervention measures could be either proposed by the Commission in the form of recommendations or legislation that would allow governments — but not oblige them — to step into the market. The third option would be mandating all member states to intervene.
The commission is due to discuss the options with experts from member states at a technical meeting on Sept. 7, according to EU diplomats.
“It broadly makes sense but the devil is definitely in the detail: how do you siphon off those profits exactly?” said Hanns Koenig, a managing director at Aurora Energy Research in Berlin. “It’s certainly not going to bring prices back down to the levels of two or three years ago, but re-purposing the power-producer profits should enable governments to subsidize the energy costs of households and businesses substantially.”
(Updates with EU advice on measures not to be followed in the 12th paragraph.)
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