Europe’s plan to tackle the winter energy crisis

Earlier this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a series of supply cuts that Moscow blamed on Western sanctions imposed after the country’s invasion of Ukraine.

The EU Commission will present the EU’s proposal on Wednesday, after which the governments can work out the details and possibly approve them at a meeting of energy ministers on 30 September.

Here’s what’s in a draft of the European Commission’s upcoming proposal, seen by Reuters.

UNEXPECTED CHARGES ON NON-GAS CLAIMS

The EU’s draft proposal would collect revenue from non-gas power plants and require governments to use the money to protect consumers and industry from skyrocketing energy bills.

In the EU system, it is often gas-fired power plants that determine the price of electricity. Non-gas power stations sell their electricity at the resulting high prices – even though they don’t have to pay sky-high gas bills.

Brussels wants to skim any additional revenue generated by wind, solar, nuclear and biomass plants under this system, according to the draft, which is subject to change before it is published.

The measure will apply a price ceiling per megawatt-hour on the income these producers receive for their electricity on the market. The revenue cap will be applied after electricity transactions have been settled so that it will not directly affect prices on Europe’s exchange-traded electricity market, the draft states. Income from public subsidy schemes would be excluded.

Coal-fired plants will not be covered by the directive, as their fuel costs have also risen sharply this year, the draft states.

An earlier draft of the proposal seen by Reuters included a revenue cap of EUR 200/MWh. Germany’s annual electricity price last month reached a record high of more than EUR 1000/MWh and is currently trading at around EUR 460/MWh.

Industry groups say most wind farms in Europe do not make a dent in high energy prices as they sell their power on fixed-price contracts, many of which are state-backed – raising questions about how much money the EU measure would save. yield.

PROFIT SHARING FOR FOSSIL FUEL COMPANIES

Companies that have made huge profits selling fossil fuels at record prices should make a financial contribution to help citizens and industries struggling with skyrocketing bills, according to EU draft plans.

EU countries will introduce a temporary “solidarity contribution” for oil, gas, coal and refining companies based in the EU. Those companies would have to contribute one-third of their “taxable profits in tax year 2022,” according to the draft.

Some countries, including Italy, have already introduced a tax on windfall profits for energy companies. Under the draft, Brussels would introduce a minimum rate for all EU countries, but governments could choose a higher rate.

DEMAND FOR ELECTRIC SCREW BACK

The EU’s draft proposal would oblige countries to reduce their electricity consumption this winter so that Europe has enough fuel to get through the colder months.

Gas storage in the EU is now 84% full, which is more than the EU target for filling the pre-winter storage. But analysts say Europe still needs to use less gas in winter to prevent storage facilities from running out. The EU countries have already agreed to limit their gas demand this winter – and electricity consumption may be next.

During periods of “peak” electricity prices, EU countries should limit their electricity consumption by a percentage that has not yet been determined, according to the draft.

The EU countries will also have a voluntary target to reduce their electricity consumption. An earlier draft predicted a voluntary reduction of 10% in the coming months compared to the average for the same month in the period 2017-2021 and a reduction of 5% during peak hours.

EMERGENCY LIQUIDITY FOR ELECTRICITY COMPANIES

EU countries have also instructed Brussels to design “emergency liquidity instruments” to help energy companies facing skyrocketing collateral needs.

Utilities sell some power in advance to secure a certain price, but must make a cash deposit with the exchanges if they default before the power is produced. Rising energy prices have forced companies to make bigger margin calls, leaving some scrambling to find the extra cash.

EU officials said emergency liquidity support plans were still being prepared and were likely to be announced later than Wednesday. A note published by the Commission last week identified some options that EU policymakers are exploring.

This could include accepting a wider range of assets as collateral for margining purposes, facilitating collateral conversion, providing bank guarantees and, as a liquidity provider, mobilizing government guarantee schemes to support such liquidity mechanisms.

NO GAS PRICE CEILING

The draft of the EU proposal did not include a gas price ceiling – an idea that has divided the bloc’s member states.

EU countries have asked Brussels to propose a cap, but disagree on whether this should apply to all imported gas, pipeline flows or wholesale gas.

Germany, the Netherlands and Denmark oppose a blanket cap on gas, warning that it could leave countries struggling to attract supplies on price-competitive global markets and could put Europe’s energy security at risk over the winter.

Italy and Poland are among the proponents, who say that a cap on gas prices will lower bills for citizens and industry.

The EU has also withdrawn from an earlier plan to introduce a price cap on Russian gas. Countries such as Hungary and Austria had opposed the idea in case Moscow retaliated by cutting off the dwindling supplies it still sends to the EU.

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