Energy: the Commission acts

By Richard North - September 15, 2022

After a number of inspired leaks, the Commission has finally come out into the open with a formal proposal, presented yesterday by Commission vice president Frans Timmermans (pictured), at the European parliament in Strasbourg.

The Commission calls its action an “emergency intervention” in Europe’s energy markets, the intention being to tackle the recent “dramatic price rises”, the EU having been confronted with the effects of a severe mismatch between energy demand and supply, “due largely to the continued weaponisation by Russia of its energy resources”.

To ease the increased pressure on European households and businesses, the Commission is now formally proposing “exceptional electricity demand reduction measures” aimed at reducing the cost of electricity for consumers. Additionally, it is proposing measures to redistribute the energy sector’s “surplus revenues” to final customers.

In general terms, there is nothing new here, but this is the first time we’ve seen the proposals with a Commission label on them, so it is worth recording their final journey into the public domain, especially as the proposed regulation has also been published.

There, in the explanatory memorandum, the Commission is even more robust in the condemnation of Russia, writing that:

Energy prices are expected to remain high due to uncertainty in the market following a series of gas supply disruptions that can only be explained by a deliberate attempt by Russia to use energy as a political weapon. Further disruptions of Russian gas supplies to the EU in the forthcoming weeks or months may result in even higher levels of gas prices with knock-on effects for the price of electricity, the level of inflation and its impact on citizens as well as the overall financial and macroeconomic stability of the EU.

Back in its press release, the Commission tells us its action follows on from previously agreed measures on filling gas storage and reducing gas demand to prepare for the upcoming winter. It says it is also continuing its work to improve liquidity for market operators, bring down the price of gas, and also seeking reform of the electricity market design for the longer term.

Unlike the UK, where The Replacement is revelling in the freedom to do her own thing, the Commission’s first response in tackling high prices is to propose measures to reduce demand.

This, it says, can impact electricity prices and achieve an overall calming effect on the market. To target the most electricity consumption, when gas-fired power generation has a significant impact on the price, the Commission is proposing an obligation to reduce electricity consumption by at least 5 percent during selected peak price hours.

Thus, member states will be required to identify the 10 percent of hours with the highest expected price and enforce a reduction in demand during those peak hours. The Commission also proposes that member states aim to reduce overall electricity demand by at least 10 percent until 31 March 2023.

States are allowed to choose the appropriate measures to achieve this demand reduction, which may include financial compensation. But what is interesting is the scope of the measures required.

For instance, to achieve the 5 percent target, action is required from all consumers, including those who are not yet equipped with smart metering systems or devices enabling them to adjust their consumption during the day. Measures taken by member states, the Commission says, should be sufficiently ambitious and could include, for example, targeted consumer information and communication campaigns.

As for the 10 percent figure, a more complex series of measures is proposed, addressed to consumers who can deliver flexibility through demand reduction or demand shifting offers on an hourly basis.

Measures might include “economically efficient and market-based measures such as auctions or tender schemes for demand side response or electricity not consumed”. Existing schemes can be expanded, and financial incentives or compensation can be paid for electricity not consumed, “without prejudice to the application of State aid rules”.

Through these measures, the Commission estimates that gas consumption can be reduced by 1.2bcm over the winter.

The Commission has also confirmed that it is proposing a temporary revenue cap on what it calls “inframarginal” electricity producers, namely technologies with lower costs, such as renewables, nuclear and lignite, which are providing electricity to the grid at a cost below the price level set by the more expensive “marginal” producers.

These inframarginal producers, the Commission says, have been making exceptional revenues, with relatively stable operational costs, as expensive gas power plants have driven up the wholesale electricity price they receive.

The cap is to be set at €180/MWh, as opposed to the €400-plus levels seen recently – enough, the Commission says, to allow producers to cover their investment and operating costs without impairing investment in new capacities. Revenues above the cap will be collected by member state governments and used to help energy consumers reduce their bills.

Member states trading electricity are encouraged, in a spirit of solidarity, to conclude bilateral agreements to share part of the inframarginal revenues collected by the producing State for the benefit of end-users in the member state with low electricity generation.

The Commission, as predicted, is also going ahead with its “solidarity contribution” on excess profits generated from activities in the oil, gas, coal and refinery sectors, but this will only apply to operations not covered by the inframarginal revenue cap.

This is expected to raise €140 billion and will be collected by member states on 2022 profits which are above a 20 percent increase on the average profits of the previous three years. The revenues will be redirected to energy consumers, in particular vulnerable households, hard-hit companies, and energy-intensive industries.

Member states are also allowed to finance cross-border projects or use part of the revenues for the common financing of measures protecting employment or promoting investments in renewables and energy efficiency.

In one further intervention, the Commission is also proposing to expand the “Energy Prices Toolbox”, which would allow below cost regulated electricity prices for the first time and expand regulated prices to also cover small and medium-sized enterprises.

Over and above all this, the Commission is continuing to pursue other avenues to bring down prices and ease pressure on the market. It will “deepen its discussion” with member states about the best ways to reduce gas prices, also analysing various ideas for price caps and enhancing the role of the EU Energy Platform in facilitating lower price agreements with suppliers through voluntary joint purchasing.

It is also working on tools to improve liquidity on the market for energy utilities and reviewing the Temporary State aid Crisis Framework to ensure that it continues to enable member states to provide necessary and proportionate support to the economy.

One cannot avoid making the contrast with the [lack of] measures proposed by The Replacement, other than to protect suppliers’ profits, in the context where all we have in writing is the Hansard edition of her speech, and no confirmation of the details.

This is leaving businesses in the dark as to what the “equivalent support” promised actually means, with no details on how much support they will get.

Compared with the 41-page Commission proposal, all businesses have to go on is a statement from a government spokesman telling them that the government will confirm further details of the business support scheme next week, promising support with their October energy bills, including backdating “if necessary”.

As for domestic consumers, they have not yet been told what their energy rates will be after 1 October, and neither has the government disclosed how much they will be required to subsidise energy suppliers through taxation.

For sure, the combination of the prolonged Tory leadership campaign and the period of mourning for the Queen has created exceptional circumstances which have led to the delays in publishing details of the UK schemes, but the over-riding impression is one of a lack of urgency and complete lack of grip.

Nevertheless, the nation will doubtless be pleased to learn that the Ukrainian state electricity system operator has promised that, “under any circumstances”, central heating supplies will be ensured to Ukrainian households.