The Czech Presidency of the Council of the European Union appeared to lose patience with the European Commission’s lack of a concrete proposal to cap gas prices, on Tuesday 25 October at a meeting of EU energy ministers in Luxembourg.
One of the aims of the meeting was to discuss the Commission’s latest proposals to tackle rising gas prices and, by extension, reduce electricity prices.
Presented on 18 October in the form of a proposal for an EU Council Regulation (see EUROPE 13045/1), these emergency measures include the use of joint gas purchases, the strengthening of energy solidarity measures, the development of an alternative benchmark to the Dutch TTF for EU liquefied natural gas (LNG) import prices, and a mechanism to limit the price of fossil gas transactions pending the introduction of a new price index (see EUROPE 13045/10)
The package therefore does not include a cap on the price of gas used to generate electricity, much to the dismay of many Member States.
Three days after the package was presented, the European Council instructed the Commission to submit “concrete decisions” on a series of measures, including the idea of a “temporary EU framework for capping gas prices in electricity generation” (see EUROPE 13047/1).
At the insistence of many Member States, the Commission finally sent them a non-paper examining this option on the eve of the ministers’ meeting.
This initiative was deemed insufficient by the Czech Presidency of the EU Council at the end of the meeting. “I see the non-paper as a contribution to the discussion, but it’s not a proposal (...) We need more details, a concrete legal proposal or impact study”, said Jozef Síkela, the Czech Minister of Industry and Trade.
The French Minister for Energy Transition, Agnès Pannier-Runacher, agreed. According to her, the ministers clearly expressed their expectation that “the mandate given by the European Council will lead to concrete proposals on the decoupling of the gas price from the electricity price in the first place, concrete proposals on the price corridor or cap on the gas price and concrete proposals on the common purchasing platform mechanism”.
“The ball is in the Commission’s court. To move forward, we need a proposal”, added her cabinet.
The Commission remains cautious
However, the Commission seems less than enthusiastic about the option of capping the price of gas used to generate electricity, an idea put forward by France and supported by several Member States.
Its non-paper lists a series of conditions to be met in order to introduce such a mechanism (already in place in the Iberian Peninsula - see EUROPE 12968/4), while highlighting the associated costs.
Since this mechanism combines a subsidy to fossil fuel producers with a tax on electricity, the Iberian mechanism raises the question of its financing and the risk of flows of subsidised electricity from EU citizens’ money to third countries connected to the EU electricity grid (e.g. Switzerland and the UK). It also carries the risk of increasing consumption, the Commission claims.
As an alternative, the institution suggests the possibility of bringing forward the structural reform of the market - scheduled for the first quarter of 2023 – to mitigate the impact of gas on electricity prices.
“Such a reform should address only those essential elements of the market design that can be implemented rapidly”, the non-paper says.
Under this system, inframarginal power generators – i.e. technologies that produce at a lower marginal cost than the wholesale market price (e.g. renewables and nuclear) – would be remunerated under contracts for differences, irrespective of the marginal price. The price of these contracts would generally be set by tenders and would be a direct function of the actual production costs of the technologies concerned.
Gas-fired power generation would have the role of “counterbalancing the effect of volatile renewable generation”. To achieve this, the new revenue structure for inframarginal generators based on contracts for differences should be complemented by a well-functioning short-term market that ensures that the cheapest and most efficient technology is used at all times, says the Commission.
This would require a well-integrated and interconnected market, in which all barriers to alternative technologies, such as storage and demand response, are removed so that these technologies compete on a level playing field and can gradually replace gas-fired power plants, in addition to renewable and low-carbon sources.
Reacting to this option, Ms Pannier-Runacher expressed her fears that such a reform would take too long in view of the urgency of the situation.
Ministers to meet again on 24 November
At a press conference, the Commissioner for Energy, Kadri Simson, seemed to pass the ball to the Member States. “Now, it’s up to the Member States if they will find a solution, especially how to well address the flows to third countries and how to agree on the cost sharing principles”, she said.
When asked about the possibility that the Commission might abandon the Iberian mechanism option, Agnès Pannier-Runacher’s cabinet said that this was “institutionally impossible”, as “the European Council has given (the Commission) a very clear mandate in a consensual and unanimous manner”.
For his part, Mr Síkela announced that he would organise another extraordinary meeting of energy ministers on 24 November with the aim of adopting proposals.
See the Commission’s non-paper: https://aeur.eu/f/3s4 (Original version in French by Damien Genicot)