Europe’s plan to tackle the energy crisis is not perfect

With European gas prices around 10 times higher than their long-term average, gas has become the source of electricity that provides the last element of supply that matches demand and so it is gas that has set the price of electricity on European markets . It is the marginal source of supply.

While there had been talk of effectively creating two energy markets – one for “inframarginals” and the other for gas – the EU opted for a simpler but more interventionist approach.

It proposes a temporary income cap for inframarginal producers at 180 euros ($266) per megawatt hour.

The EU is trying to work its way through the coming winter to buy time to deal with longer-term supply issues.Credit:PA

“These inframarginal generators have achieved windfall revenues, with relatively stable operating costs, as expensive gas-fired power plants have driven up the wholesale price of the electricity they receive,” the commission said.

He said the cap was set at a level that would allow producers to recoup their investment and operating costs without hurting investment in new capacity.

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Everywhere except in the EU, the cap would be called a windfall tax, but if it were called a tax, it would require the approval of all its member states. Some members are less committed to the European response to the invasion than others, like Hungary, who are unlikely to support the measures.

The other measure in the proposed package is a “temporary excess profit solidarity contribution” generated by the oil, gas, coal and refining sectors, to be levied on 2022 profits above a 20% increase over compared to the average profits of the previous three. years.

EU members would collect a third of these “surpluses” or windfall profits, although individual states are free to impose higher rates.

Some states already have windfall taxes on their fossil fuel companies, as did the UK after oil, gas and coal prices spiked following the Russian invasion.

Between the two windfall and profit taxes, EU states would collectively raise more than €140 billion ($207 billion), with inframarginals contributing around €117 billion and fossil fuel producers for around 25 billion euros.

This windfall revenue for EU states would be used to compensate households and businesses for rising energy prices and pay for industry shutdowns during peak periods.

Russia's weaponization of its gas is causing significant damage to Europeans, but the long-term structural damage to the Russian economy caused by its decision to invade Ukraine will likely have larger and more lasting consequences.

Russia’s weaponization of its gas is causing significant damage to Europeans, but the long-term structural damage to the Russian economy caused by its decision to invade Ukraine will likely have larger and more lasting consequences.Credit:PA

The measures are all described as temporary because the EU knows the imperative is simply to survive the coming winter.

With gas storage levels in Europe at around 85%, there is growing confidence that the region can weather the winter without the catastrophic energy shortages that Russia holds up as a threat – as long as the season is relatively soft.

Russia has threatened to keep the Nord Stream 1 gas pipeline which is the main conduit for Russian gas to Germany and central Europe closed unless the EU lifts its sanctions, hoping to encourage opposition popular and political to the EU position on Ukraine and the fragmentation of which has so many surprising levels of unity among EU members.

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Large-scale power cuts – no heating or lighting in the depths of anything other than a mild winter – could, of course, put pressure on what is a wide and disparate range of member states.

If the EU manages to find its way through next winter, it will have bought time to sort out longer-term supply issues. Countries like Germany are grabbing as many floating LNG terminals as they can and securing LNG supply contracts wherever they can while building onshore terminals as quickly as possible.

Much of the US LNG that was sold in Asia has been redirected to Europe, and the Qataris have also struck a number of deals with European buyers.

The EU would know that developing the domestic infrastructure and securing the supply that would allow it to fully replace and distribute the 40% of its gas needs that came from Russia will take more than 12 months.

With gas storage levels in Europe at around 85%, there is growing confidence that the region can weather the winter without the catastrophic energy shortages that Russia holds up as a threat – as long as the season is relatively soft.

It still won’t have the LNG facilities and pipeline infrastructure in place, or the additional capacity from renewables or nuclear, to meet that goal before winter next year.

By then, however, Russia would have lost its influence. Indeed, once it announced it would cut most of its gas supply unless EU sanctions were lifted, it lost that leverage.

With sanctions on its oil exports to be imposed before the end of the year, probably in the form of a cap on the price that buyers can pay without being sanctioned themselves (and lower prices inducing alone to comply), Russia could also see its main source of income reduced.

He could, as he threatened, simply stop exporting oil and the price of oil would soar to stratospheric levels, but that would be even more economically devastating for his own oil-dependent economy, which is already shrinking as the effects of the existing sanctions are beginning to be felt. bite.

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Russia’s weaponization of its gas is causing significant damage to Europeans – it will likely help push the Eurozone into recession – but the long-term structural damage to Russia’s economy from its decision to invade Ukraine will have probably larger and more lasting consequences.

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Mary I. Bruner