The European Union is discussing strategies to reduce electricity costs. While none of the proposed electricity market measures will solve the current problem of record high gas prices, there are three solutions to deal with the current energy crisis, writes Dr. Bernd Weber.
dr Bernd Weber is Professor of EU Energy Policy at the College of Europe and founder and director of the think tank EPICO KlimaInnovation.
The Russian military invasion of Ukraine has put the EU at a crossroads with skyrocketing gas and electricity prices. European member states have very limited time to agree on and implement a common strategy that will reduce energy costs for households, businesses and industry.
However, the current proposals to limit the profits of infra-marginal producers do not do justice to the critical extent of the current energy crisis. This is because such measures include several exemptions and do not affect all renewable energy production.
However, these ignore the high proportion of hedged volumes, which even more calls into question how the Commission intends to achieve the announced revenues of 117 billion euros in concrete terms.
While technology-specific caps could theoretically increase revenue, implementing them would be a major challenge as they increase the risk of market distortions and require very specific data and calculations that EU Member States cannot collect in a timely manner.
These also lead to more uncertainty, for example being silent about what happens to generation plants based on more than two technologies.
Caps therefore need to be designed very carefully, balanced and least disruptive. A uniform measure for all technologies in all member states reduces the risk of investments in certain technologies.
Investment risks also decrease when EU governments ensure the temporary and one-off implementation of caps on infra-marginal power generation.
Similarly, Member States only have to apply this measure to new contracts. Excess profits from cross-border sales with third countries should be realized in the producers’ respective countries to avoid trade distortions.
Likewise, this must be coupled with a transparent, common and legally binding demand reduction target for all Member States. These aim to ensure that gas consumption is reduced as much as possible, with demand reduction measures focused on the hours when gas-fired power plants are running.
Industry is more predictable than households, so efforts to reduce demand should be focused on production rather than households. Likewise, the baseline must be well defined to ensure that demand reductions take place and market participants do not circumvent the system.
However, additional efforts are needed to lower gas prices and relieve consumers. Interventions in the gas market are therefore unavoidable, but must be carried out in a coordinated manner by all EU member states.
The least disruptive way to do this, while balancing Member States’ autonomy with the aim of reducing energy bills, is to set a limit on the TSOs’ balancing energy price.
In the event that gas is not available at such a price, TSOs can apply throttling (ie intentionally reduce energy output) and discourage gas suppliers from exceeding this price limit when buying gas.
Besides decreasing risk premia on futures prices (erasing problems related to supply disruptions – to which the EU is becoming increasingly accustomed), such an approach would ensure that gas producers sell new contracts at levels that do not exceed the set limit.
This measure can be further strengthened by allowing investors to take a long position on LNG purchases and by introducing contracts for differences on LNG imports. In return, the EU would have a back-up measure to keep sufficient quantities of LNG on hand.
Finally, these measures should go hand in hand with pan-European gas savings targets, which in turn would also help to lower gas prices.
Ultimately, the most efficient way for the EU to deal with this crisis is to adopt a strong, unified and coordinated interim emergency response that reduces demand and increases gas savings.
This must ensure investment in renewable energy while protecting the pockets of families and businesses across Europe.
It is up to national governments to decide: is this energy crisis a catalyst for coordinated and coherent energy policies across member states, or an example of the inability of EU capitals to take joint action?