How could Europe limit soaring energy prices?, Energy News, ET EnergyWorld

FRANKFURT/BRUSSELS: The European Union is preparing contingency plans to cap gas prices or separate electricity prices from the skyrocketing cost of gas – along with longer-term reforms to ensure that prices of electricity reflect cheaper renewable energy.

Energy ministers from EU countries will meet on September 9 to discuss how to ease the burden of soaring energy prices on businesses and households as a matter of urgency.

Electricity costs in Europe rose last year, driven by record gas prices as Russia curtailed supplies in Europe.

European governments have accused Moscow of using the energy as blackmail, in retaliation for Western support for Ukraine after the Russian invasion. Russian gas giant Gazprom blamed the cuts on Western sanctions and technical issues.

Changing the energy systems of the 27 EU countries can be complex and time-consuming, as cross-border trade in energy products between bloc members has taken two decades to emerge and solidify. But policymakers are racing to find a short-term solution.

Here’s why Europe is considering energy market reforms and what they might entail.

WHY IS THE PRICE OF ELECTRICITY LINKED TO GAS?

In the EU energy system, the wholesale price of electricity is set by the last plant needed to meet overall demand.

Wind farms, nuclear, coal and gas power plants and all other generators bid on the electricity market, with the cheapest sources coming first, followed by more expensive sources like gas. Gasworks often set the price in this system.

The idea is that, as all producers sell their electricity at the same price, the cheaper renewable energy producers end up with a higher profit margin – a stimulus that incentivizes more investment in the production of renewable energy whose Europe needs to achieve its climate change goals.

But countries like Spain have said the system is unfair because it results in cheap renewable energy being sold to consumers for the same price as more expensive fossil fuel-based electricity.

Gas prices have soared as Russia cut the volumes it sends to Europe and amid intense global competition for non-Russian gas. The effect was to drive up the price of electricity generation from gas in Europe, leading to an overall increase in electricity prices.

Germany’s benchmark electricity contract for 2023 hit a record high of 1,050 euros per megawatt-hour (MWh) in late August, 14 times the level of a year ago, although prices have since partially retreated.

Other factors pushing power prices up include problems with French nuclear power plants https://www.Reuters.com/world/france-braces-uncertain-winter-nuclear-power-shortage-looms- 2022-08-30/ and the severe drought in Europe which hampered hydroelectric production and affected coal deliveries.

HOW COULD THE EU CHANGE ENERGY PRICES?

European Commission chief Ursula von der Leyen said the EU should decouple the price of gas and electricity, without giving further details.

A draft Commission memo, seen by Reuters last week, said the Commission’s upcoming proposals are expected to include a price cap for certain electricity generators that do not run on gas.

Soaring electricity prices have generated windfall revenues for non-gas generators with lower running costs, such as wind farms and nuclear power plants, and the EU has said countries should use price caps to skim off that revenue and spend the money to reduce consumer bills. .

The Czech Republic, which holds the rotating EU presidency, also offered options for energy ministers to consider when they meet on Friday.

They include a cap on the prices of gas imported from certain countries, a cap on the prices of gas used to generate electricity or the temporary removal of gas-fired power plants from the current EU electricity pricing system. .

The idea of ​​capping gas or electricity prices has long been backed by Spain, Belgium and others, as well as initially reluctant countries like Austria and Germany. France is one of the States in favor of an action to separate the prices of gas and electricity.

One option, proposed by Italian Prime Minister Mario Draghi, would be for EU countries to agree to a cap on the price of gas imported from Russia. Critics say it would risk completely cutting off Europe’s gas supply in retaliation.

Another option could be for governments to cap the price of gas and pay gas companies the difference between the capped price and the higher market price.

Countries like Germany and the Netherlands had previously opposed it because it would effectively subsidize fossil fuel production with public funds they say would be better spent switching to cheaper clean energy.

The Czech suggestions also include temporarily limiting electricity trading on European exchanges to intraday and daily transactions.

Other options could include restricting the participation of financial speculators in gas markets or creating a parallel gas-fired electricity market separate from the existing electricity market.

WHAT ARE THE POTENTIAL CONS?

High gas prices provide financial incentives for industries and households to reduce their gas consumption – a change in behavior that governments are trying to encourage to ensure there is enough fuel to get through the winter.

Capping the price of gas would limit that incentive, and critics say it could even encourage greater gas use when governments need to roll out policies to reduce consumption.

Some analysts have suggested that targeted financial support for low-income households and businesses hardest hit by the price spike would be a better option than a hasty market overhaul.

Other questions remain as to how governments could cap the cost of gas-fired electricity in a way that does not encourage gas plant owners to produce less electricity when countries need it. urgent.

Mary I. Bruner