The European Commission urges member states to intervene in energy markets to prevent a further rise of gas and electricity prices.

“The EU is confronted with the effects of a severe mismatch between energy demand and supply, due largely to the continued weaponisation by Russia of its energy resources”, the Commission announced in a press release on Wednesday.

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Oil refinery at night. Shutterstock/TTstudio

Commission Executive Vice-President Frans Timmermans said in Strasbourg: “We need to understand that the pre-war situation with abundant, cheap fossil fuels is not coming back. Putin’s weaponization of energy is confronting us with increasingly unbearable energy bills that households, and especially small and medium-sized enterprises, are grappling with. Leaving this to the market would mean pricing out the poorest consumers, pushing businesses to the brink of collapse, and letting families go cold. Not everyone needs help with their bills. But those who need it, and those are millions and millions of Europeans, need it very urgently.”

The Commission wants to tackle the issue by proposing “exceptional electricity demand reduction measures”. These are said to help reduce the cost of electricity for consumers. Also on the table are measures to redistribute the energy sector’s surplus revenues.

Commission’s proposal for market intervention

The proposal follows on from previously agreed measures on filling gas storage and reducing gas demand. They are aimed at preparing Europe for the upcoming winter. The main measures in the package, which were outlined in Commission’s President Ursula von der Leyen’s State of the Union speech, are as follows:

  • An attempt to reduce electricity demand during peak hours. The aim is to “achieve an overall calming effect on the market”. The EU executive wants member states to target the most expensive hours of electricity consumption when gas-fired power generation has a significant impact on the price. It proposes an obligation to reduce electricity consumption by at least 5 percent during peak price hours. Member states will be required to identify the 10 percent of hours with the highest expected price. They would then have to reduce demand during those hours by at least 5 percent.
  • The Commission also proposes that the 27 EU member states aim to reduce overall electricity demand by at least 10 percent before the end of March 2023. To do so, they can choose the appropriate measures to achieve this. These may include financial compensation. Reducing demand at peak times would lead to a reduction in gas consumption by 1.2 billion cubic metres over the winter, according to the Commission.

“The pre-war situation with abundant, cheap fossil fuels is not coming back”  Frans Timmermans

  • Furthermore, the Commission is also proposing a temporary revenue cap on so-called “inframarginal” electricity producers, e. technologies that have lower production costs, such as renewables, nuclear power, and lignite. “These inframarginal producers have been making exceptional revenues, with relatively stable operational costs, as expensive gas power plants have driven up the wholesale electricity price they receive”, stated the Commission. Under its proposal, an inframarginal revenue cap is to be set at €180 per megawatt-hour. This would allow producers to cover their investment and operating costs without impairing investment in new capacities in line with our 2030 and 2050 energy and climate goals. Revenues above that cap would be collected by member state governments and used to help energy consumers reduce their bills. According to von der Leyen, an estimated €140 billion in excess profits could thus be redistributed.
  • Moreover, member states trading electricity are encouraged to conclude bilateral agreements to share part of the inframarginal revenues collected by the producing state for the benefit of end-users in the member state with low electricity generation. Such agreements should be concluded by 1 December 2022 where a member state’s net imports of electricity from a neighbouring country are at least 100 percent, said the Commission.

Also on the table is a “temporary solidarity contribution” on excess profits generated from activities in the oil, gas, coal, and refinery sectors which are not covered by the inframarginal revenue cap. This time-limited contribution would maintain investment incentives for the green transition. It would be collected by member states on 2022 profits which are above a 20 percent increase on the average profits of the previous three years.

These excess revenues of energy producers would be collected by member states and redirected to energy consumers, in particular vulnerable households, hard-hit companies, and energy-intensive industries.

In a further market intervention, the Commission proposes to allow below-cost regulated electricity prices for the first time and expand regulated prices to also cover small and medium-sized enterprises.

The Commission said it would deepen its discussion with member states about the best ways to reduce gas prices, also analysing various ideas for price caps and enhancing the role of the EU Energy Platform in facilitating lower price agreements with suppliers through voluntary joint purchasing. In addition, Ursula von der Leyen told the European Parliament that she had initiated talks with Norway, one of the leading European producers of natural gas, to cut the price of gas. “I have agreed with Prime Minister [Jonas] Store to set up a task force. Teams have started their work”, she said.

The Commission proposals are still subject to the approval of the member states.

Author: Michael Thaidigsmann