European Council approves regulation to curb energy bills

Energy - October 18, 2022

The ministers of the EU Member States with responsibility for energy met today to discuss the long-awaited measures to curb the energy crisis. The European Council saw the EU energy ministers agree on the regulation containing agreed measures to ease the cost of energy bills in Europe.

The Transport, Telecommunications and Energy Council had already held an extraordinary meeting on 9 September to discuss a range of options, suggested by the EU Presidency, to mitigate the escalating energy costs that are straining citizens, businesses and national governments across Europe.

At that meeting, the representatives of the Member States identified four areas of action on which to urge the Commission: capping the revenues of producers with low production costs; the price cap hypothesis on gas; measures to reduce and contain consumption; and action to solve liquidity problems.

Subsequently, on 14 September, the EU Commission announced two energy demand reduction targets, setting the first, non-binding target at 10% until 31 March 2023. The second proposed target is a mandatory 5% reduction in electricity demand for at least 10% of peak demand hours each week.

The Commission also proposed a revenue cap for so-called ‘infra-marginal’ electricity producers. These are those producers that can supply electricity to the grid at a cost below the price level set by the most expensive, using technologies with lower costs, such as renewables, nuclear and lignite.

Then THE SHOCK came from Germany governed by the left-wing ‘traffic light’ coalition, which has been keeping Europe on its toes for weeks with its substantial opposition to the cap on the gas purchase price.

Chancellor Scholz appeared in a video conference – due to a coronavirus infection – declaring that gas prices at their highest level for 70 years should fall. So here is the unilateral move of the Germans, opening a 200 billion ‘defensive umbrella’ that they will find by feeding the Economic Stabilisation Fund (originally created for the pandemic crisis) to be funded through loans.

A shock announcement right on the eve of the European Council on 30 September, but above all a real cold shower for all supporters of European solidarity. Many chancelleries turned up their noses after Germany intervened on its own by also announcing the end of the tax that had been put on gas. From Italy, outgoing Prime Minister Mario Draghi made himself heard and did not hide his annoyance at the German decision: ‘We cannot divide ourselves according to the space in our national budgets. In the upcoming European Councils we must show unity, determination and solidarity,’ he said.

ECR Party President Giorgia Meloni condemned the attitude of European states that take autonomous solutions on the gas crisis. “Faced with the momentous challenge of the energy crisis we need an immediate response at European level to protect businesses and families,” she said. “No member state can offer effective, long-term solutions on its own in the absence of a common strategy, not even those that appear less financially vulnerable.”

For ECR MEP Nicola Procaccini, of the Fratelli d’Italia party, the proposal to have both a European price cap and the decoupling of the gas price from the electricity price is reasonable and supportable. The MEP, who deals with environmental and energy dossiers, is also in favour of the hypothesis of a tax on extra profits. Procaccini points out that, however, there are still no measures to intervene on the current financial speculation and this, for the ECR MEP, risks making all the interventions in vain.

Tensions have risen in recent days over the likely sabotage of the North Stream 1 and 2 gas pipelines. A number of underwater explosions warned by Swedish and Danish seismographs and a gas leak boiling in the Baltic Sea led to the discovery of four leaks in the pipelines that bring Russian gas to Europe. This is yet another dramatic event, adding to Russia’s well-established practice of using stop-and-go of its supplies as weapons.

Sweden has expressed serious concern about the incident, announcing that it will take what is a security issue for the whole of Europe to the next European Council.

“We have to discuss what security means in this situation,” acting Swedish Prime Minister Magdalena Andersson told the TT news agency, adding that “this is about the European energy supply and the security of the European energy system”.

Although no gas is currently supplied through either pipeline, what has happened is important for the energy system in the future, Andersson said.

According to the EU High Commissioner for Foreign Policy, Josep Borrell, Europe will have to respond strongly to the ‘deliberate sabotage’ that would be ‘the consequence of explosions caused by divers or a submarine.

The Council of 30 September held in Prague, as the presidency of the Union is temporarily assigned to the Czech Republic, finally approved the emergency measures that had been taking shape during these months and weeks of dramatic crisis.

“The agreement reached today will bring relief to European citizens and businesses. Member States will flatten the electricity demand curve during peak hours, which will have a direct positive effect on prices. Member States will redistribute excess profits from the energy sector to those who have difficulty paying their bills,” said Jozef Síkela, Czech Minister of Industry and Trade.

With regard to the reduction of energy demand, a voluntary overall target of 10 per cent of total gross electricity consumption was agreed, and a mandatory 5 per cent reduction was also introduced. The agreement stipulates that it will be the individual European nations, through their governments, who will identify 10 % of their peak hours between 1 December 2022 and 31 March 2023, triggering the demand reduction mechanisms.

The revenue cap for inframarginal producers, but also electricity brokers, has been set at EUR 180/MWh. The rationale for the measure is based on the fact that those who produce energy from renewables, nuclear and lignite, have enjoyed exceptional gains in recent times, due to the mechanism that sets the price on the market, while maintaining identical operating costs, which on average are lower than for other types of production.

However, the flexibility of the agreement, which leaves EU countries free to intervene even at national level on price caps, is creating nervousness within the renewables industry, which fears a drop in investment in ‘green’ energy. European price caps and taxes designed by national governments could drive away important investors in the sector, representatives of these industries say.

Meanwhile, the European agreement also provides for a levy on fossil fuel operators. This is a temporary mandatory solidarity levy on the profits of companies active in the crude oil, natural gas, coal and refinery sectors.

Then there are the specific measures to support companies’ energy expenditure. It was agreed that National States may intervene to temporarily set a price at which companies can buy energy to support them, even considering the exceptional measure of temporarily lower prices than the cost of electricity supply.

The regulation will be officially adopted in early October and will enter into force the day after its publication in the Official Journal of the European Union. The energy demand reduction measures will apply, as already written, until 31 March next year, while the 180 €/MWh cap on electricity producers’ market revenues will apply until 30 June 2022.