High energy prices: EU ministers advise on emergency measures

Ursula von der Leyen, President of the EU Commission, presented a five-point plan on Wednesday with which she would like to reduce the currently high electricity and natural gas prices. Strictly speaking, however, this is only a kind of consultation. A formal legislative proposal is not yet on the table. First of all, the responsible 27 energy ministers want to advise from 10 a.m. on Friday. Of the many floating ideas, the Commission should only include those in its proposal that can then be passed quickly and with the necessary majority.

Will the EU decouple electricity and natural gas prices?

The design of the European electricity exchange has recently attracted a lot of attention and criticism. Above all, the so-called merit order is on everyone’s lips. This is the mechanism for setting prices on the electricity market on the following day (day-ahead market), which is closely based on economic principles.

It stipulates that power plants are switched on in the ascending order of their marginal costs until the demand for electricity is covered. The power plant that is still required at the end, currently usually a gas power plant, defines the price not only for itself, but for everyone who has offered electricity. This leads to big profits for cheap producers. This applies to renewable energies, nuclear power and also coal.

Critics now want to undermine this mechanism. But the Commission is against it. With Germany, it has support from the largest member state. Other Member States are also of the opinion that the common market is worth protecting. Fundamental changes in market design are therefore hardly to be expected for the time being. These will probably appear in the medium-term reform proposals of the Commission at the beginning of 2023.

Is the Robin Hood method coming?

Ursula von der Leyen’s Robin Hood method is more likely to meet with approval. The politicians feel the pressure from the population is so great that they can hardly leave Brussels without doing anything. In its five-point plan, the Commission proposes that the price of electricity on the electricity market for cheap manufacturers be limited in future. The “Financial Times” wrote of 200 euros per megawatt hour as a possible limit. The difference to the market price, recently around 440 euros, would then flow to the member states. They, in turn, should pass this on to citizens and companies who are particularly able to perform under the high energy prices and thus prevent having to freeze in winter.

But there are also critics. The Polish Prime Minister Mateusz Morawiecki announced in the “Financial Times” that he considered this proposal to be too lengthy. After all, the money still has to be distributed, which takes time. He would rather suspend emissions trading, a tool to cut emissions that Poland has never really gotten to grips with.

Is there a price cap for natural gas?

The Commission also wants to cap the price of Russian natural gas. But this point causes major differences among the member states. Some want gas to be procured in general, not just Russian, at a set maximum price. And some fear that Russian President Vladimir Putin, as threatened, will stop all exports of oil and natural gas to the EU if the confederation of states resorts to a price cap.

However, the idea is also problematic from an economic point of view. So the question remains unresolved as to who could buy this artificially cheap natural gas. Ultimately, these companies could then resell the gas at the market price and rake in a large profit. There are fears of corruption.

In addition, a general gas price cap would also jeopardize imports of liquefied natural gas (LNG) from other regions of the world. After all, the high prices are currently causing a lot of gas to be diverted to Europe. It can be assumed that this proposal will not go very far, since it will probably be limited to ideas that can be reached by consensus.

The so-called solidarity levy for oil companies, which would actually be an increase in profit tax, was also controversial in the run-up to the meeting.

Will there be mandatory power-saving regulations?

According to an EU diplomat, in addition to skimming off the high profits from producers of cheap electricity, there are also good chances of reaching a consensus on regulations to save electricity and on granting liquidity support to electricity traders.

As with natural gas, the Commission would also like to see electricity prices fall by reducing demand. In particular, Ursula von der Leyen would like all Member States to aim for fixed savings targets during periods of traditionally high demand. For example, companies could be financially rewarded at an auction if they move production from the evening, when people turn on their stoves and need a lot of electricity, into the night.

Liquidity support for electricity traders, as recently set up for Axpo by the Federal Council, should also be possible in the EU. To do this, the Commission would soften the state aid rules again or extend the exceptions that have already been introduced due to the pandemic and the war.

At what point could prices go down?

After the meeting of the energy ministers, the commission should have a concrete idea of ​​which measures are acceptable and which are not. She could then present a legislative proposal on Tuesday. This would then in turn be discussed by the member states, first at expert level, then by the ambassadors in Brussels and finally the ministers would have to meet again for an extraordinary meeting in Brussels towards the end of September to pass the law.

An EU diplomat said before the meeting that the matter would definitely be settled before the informal summit of the 27 heads of state and government in Prague in early October. The measures should therefore only take effect in a few weeks.