A binding target for reducing electricity demand, a cap on the revenues of certain electricity producers and on the price of Russian gas, and the redistribution of super-profits are some of the proposals that the European Commission intends to put forward for discussion at the meeting of the energy ministers of the European Union Member States on Friday 9 September, according to a non-paper distributed by the institution and a preliminary draft regulation obtained by EUROPE.
As foreshadowed in two draft Commission documents previously detailed in our columns (see EUROPE 13012A1, 13014/7), this will therefore be an emergency intervention package for the EU energy market.
Objective: to mitigate the socio-economic impact of soaring energy prices on households and businesses in a coordinated, EU-wide way, preserving market integrity, ensuring security of supply and avoiding an increase in gas consumption.
Reducing the demand for electricity
The Commission will propose to Member States to set two electricity demand reduction targets.
The first, binding, would require Member States to reduce their net electricity consumption during peak hours, specifically targeting those hours of consumption when electricity is most expensive, when gas usually sets the marginal price.
Under the ‘merit order’ system on which the EU electricity market operates, the wholesale price of electricity is aligned with the marginal cost of the last generation unit mobilised to meet demand (the one with the highest marginal cost), which is usually a gas-fired plant in case of high demand.
In the draft regulation, the target is set at ‘at least 5% on average’. The text further states that each month Member States should determine in advance a number of peak hours corresponding to a minimum of 10% and a maximum of 15% of all hours in the month.
However, these figures and details do not appear in the unofficial document released to the press by the Commission. Asked about the change, a senior European official said it was too early to put forward numerical targets at this stage.
To achieve this binding objective, the Commission believes that Member States could introduce “auctions in which particular categories of consumers (e.g. industrial or aggregated retail consumers) submit bids on the amount of financial compensation they would need to cut consumption”. This option therefore comes at a cost to national budgets.
The second, indicative, objective would be to require Member States to put in place measures (information and communication campaigns, calls for tender, financial incentives, etc.) aimed at reducing total consumption, taking into account those consumers who do not have smart meters or flexibility devices allowing them to react specifically to peaks.
While the draft regulation mentions a reduction of at least 10% of the monthly net electricity consumption compared to the average consumption of the corresponding month in reference periods, the document does not contain a numerical target.
Capping the income of infra-marginal producers
The second measure presented by the Commission is to set a limit on the revenues of sub-marginal electricity producers, i.e. technologies that produce at a cost below the wholesale market price (most renewables, nuclear and lignite). The difference between this cap and the producers’ income would be captured by the states.
This measure would be based on the main features of ‘contracts for difference’, i.e. long-term contracts ensuring that both the electricity producer and buyer have certainty of supply and price over the long-term.
The cap would set the same price for all sub-marginal producers in a uniform manner, “thus ensuring a European solution and a level playing field”, the non-paper stresses.
According to the draft regulation, the technologies concerned would be: wind energy, solar energy (solar thermal and solar photovoltaic), geothermal energy, non-impounded hydroelectricity, biomass, landfill gas, sewage treatment plant gas, biogas, nuclear energy, lignite, crude oil, shale oil.
The cap would cover all market periods and could be applied at the time the transactions are settled or, if not possible, afterwards.
It should also be determined in such a way as to ensure that the costs of renewable and low-carbon capacity are covered while maintaining adequate incentives for investment, the Commission notes.
While the non-paper does not specify the level of this cap, the draft regulation foresees a limit of 200 euros/MWh.
As some Member States have already put in place instruments to combat excess profits of certain electricity producers, the Commission proposes that they should be allowed to maintain existing national measures. They would also be free to introduce measures imposing stricter income limits.
Making fossil fuel producers contribute
Thirdly, the Commission wants to tackle the extraordinarily high profits that fossil fuel companies make from high prices by introducing a temporary crisis solidarity contribution.
This would use the pre-tax profits of all companies in the oil, gas and coal sectors as a basis, taking care to avoid double taxation.
Redistributing revenue
Whether it is the cap for sub-marginal producers or the contribution from fossil fuel companies, both instruments will generate additional financial revenues collected at the national level.
These “should be used to support consumers in need, both households and businesses, and help the energy transformation”, the Commission says, adding that part of the revenue generated by the solidarity contribution could finance the national REPowerEU plans.
The aid thus provided to consumers and businesses should nevertheless “comply with the State aid framework in order to avoid distortions to the single market”.
Capping the price of Russian gas
The fourth measure that the Commission will discuss with the energy ministers is to put a cap on the price of Russian pipeline gas.
“The objective here is very clear. We must reduce the income of Russia that Putin is using to finance this atrocious war against Ukraine”, said the president of the institution, Ursula von der Leyen, in a speech to the press.
While the non-paper does not provide much detail on this instrument at this stage, it does state that the price cap would apply “at the moment of the import, leaving price formation for the sale of gas within the internal market unaffected”.
On the possibility of capping liquefied natural gas (LNG) prices as well, the Commission points out that this could divert supplies to other regions, jeopardising security of supply.
However, it considers that the ‘EU Energy Platform’ should be mandated to “negotiate lower prices and secure supplies, offering a long-term perspective with a gradual transition to renewable energy sources, in particular green hydrogen”.
The institution also intends to continue the dialogue with Norway on its gas pipeline deliveries to the EU in order to “ensure security of supply and lower prices in a negotiated way”.
In its view, the ‘EU Energy Platform’ should be mandated to do this.
Strengthening market liquidity
The last of the five emergency measures planned by the Commission is to facilitate liquidity support for energy companies by Member States to cope with market volatility.
The Commission intends to seek Member States’ views on possible further changes and the prolongation of the Temporary Framework for State Aid in order “to align with this emergency package and the impacts of the energy crisis”.
Temporary measures
As emergency measures to deal with a crisis situation, the various proposals presented by the Commission should only be temporary.
The proposed regulation would thus be limited to one year, or even less for some of its articles, according to the draft version obtained by EUROPE.
As regards the legal basis, the Commission wants to adopt these various measures under Article 122 of the Treaty on the Functioning of the EU (TFEU). This provides for the possibility for the EU Council, on a proposal from the Commission, “to decide on measures appropriate to the economic situation, in particular if serious difficulties arise in the supply of certain products, notably in the energy sector”.
The Parliament would therefore not be involved in the legislative process.
See the Commission’s ‘non-paper’: https://aeur.eu/f/2zj
Ursula von der Leyen’s statement: https://aeur.eu/f/2yw
The draft regulation: https://aeur.eu/f/2zi (Original version in French by Damien Genicot)