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Can the EU agree on a plan to ease the energy crisis?

by SuperiorInvest

Just days after Russia said it would not restore gas flows through a critical pipeline to Europe, the bloc’s energy ministers backed overarching plans for a price cap on all gas imports and a tax on electricity producers.

But in an emergency meeting late last week, they struggled to agree on the details. They still have to decide whether to cap the price of all imported gas or just supplies from Russia, and how to set up a mechanism to spend the windfall profits of energy companies enjoying record high prices.

As European Commission President Ursula von der Leyen focuses on energy in her annual State of the Union address on Wednesday, bureaucrats are scrambling to find common ground among the 27 member states to avoid blackouts and financial pain for businesses and consumers this winter.

Fredrik Persson, president of industry body BusinessEurope, said “addressing skyrocketing energy prices and finding ways to mitigate them is an urgent matter of survival for both European industry and households”.

Why is the EU acting now?

Moscow announcement on Monday that gas supplies would not be restored via the Nordstream 1 pipeline until sanctions imposed after its invasion of Ukraine were lifted raised fears of a complete shutdown of Russian gas supplies.

Last year, the EU imported about 155 billion cubic meters of Russian pipeline gas, which is about 40 percent of its total supplies. This has now fallen to 9 percent, with reduced flows still flowing into Europe via Turkey and Ukraine. The supply squeeze has helped push prices up to ten times their average over the past decade.

EU gas storage levels have reached 83 percent of their total capacity, well ahead of the 80 percent target set for the end of October, raising hopes that there will be sufficient supplies this winter.

But there is still pressure on politicians to find a solution to the crisis. Many businesses in energy-intensive industries such as fertilizer and steel have already closed or reduced production, while households are having to cut back on essentials such as food to afford their energy bills.

What was proposed?

commission submit proposals on Wednesday it included proposals to cut utility company profits and recycle revenue to households and businesses, loosening state aid rules to rescue companies hit by high energy bills, mandatory reductions in peak electricity demand and, more tentatively, a cap on gas prices, including in Russia.

At Friday’s meeting, according to the Czechs, who preside over the European Council until January, the ministers agreed that Brussels should focus on four areas: reducing peak demand for electricity; unexpected charges for non-gas electricity generation; a wider gas price ceiling; and providing liquidity to energy producers faces ever higher collateral requirements.

Several EU capitals have also called for a break in the link between gas and electricity prices. Others want to temporarily reduce the cost of carbon fees that companies pay to offset their emissions.

How would price caps and surprise fees work?

This is where the consensus on what should be done breaks down. As for gas price caps, countries including Italy, Austria and Greece oppose limiting Russian imports only, fearing Moscow would cut off remaining supplies.

Broader consensus was found for a cap on a wider share of imports, but it was not agreed whether such a cap would apply only to pipeline gas or to all imports including liquefied natural gas.

Dutch Minister Hans Vijibrief
Dutch minister Hans Vijlbrief fears that a broad gas price ceiling would prevent other exporters from supplying gas © Pro Shots/Alamy

Denmark and the Netherlands are among the countries that are not interested in an overall cap, fearing that price cuts would only serve to increase consumption.

“All these big caps have the disadvantage of putting you off [securing] supplies from other countries,” said Hans Vijlbrief, the Dutch Minister of Mining.

The windfall tax on non-gas electricity producers’ profits could be structured either as revenue recapture or as more dynamic price caps that are triggered when prices reach certain thresholds.

There is also debate over whether the thresholds should be specific to each source of power generation, such as coal, nuclear, wind and solar, or whether they should be applied uniformly, in which case more expensive fuels such as coal.

Will the plan help consumers?

Analysts at data group Argus Insight said that while the EU’s desire to protect households from poverty was “laudable”, the “unprecedented pace of policy-making has resulted in a number of proposals that would fall short of this objective”.

Measures such as capping the price of all imported gas could prompt producers such as Algeria and Norway to cut supplies, although Norway said it’s open to the idea. This, in turn, could cause prices to rise further, Argus analysts argued.

But Henning Gloystein, director of energy and climate at Eurasia Group, said the combination of price caps, windfall charges and demand reductions “should actually go quite a long way to prevent further spiraling of energy costs”.

Riina Sikkut, Estonia’s Minister of Economy and Infrastructure, said mandatory reductions in electricity demand “offer huge potential to reduce prices, but more important than mandatory savings targets is shifting consumption from peak hours to off-peak hours”.

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