In the past year, Europe has been hit by extraordinarily high energy prices, mainly because of reduced gas deliveries from Russia. An extremely dry and hot summer and technical challenges at French nuclear power plants have further worsened the situation. Over time, the crisis has developed from one of prices to one of supply and many European countries are unsure whether they have sufficient energy resources to get through the winter.
The EU’s first response to these challenges was to order Member States to fill up their gas storage ahead of winter. In July, Member States also adopted a non-binding target to cut gas consumption by 15 percent during this autumn and winter. If necessary, the target can be made binding. The EU has also designed regulations intended to allow Member States to shield their consumers from high prices using various forms of market intervention, support schemes and regulated prices.
Many EU countries have asked for additional measures to counteract high power prices. With extraordinarily high gas prices, the price of electricity has also risen sharply. Gas-fired generators are often the market’s marginal source of generation, making the gas price decisive in determining the price of power.
Throughout the summer, the pressure on the Commission to take further measures to protect European consumers against high electricity prices has increased. After several weeks with various drafts and variants under discussion, the Commission presented its proposed emergency measures on Wednesday 14 September. The proposal combines the need to reduce electricity prices with the need to avoid increased gas consumption. Throughout, the Commission has emphasised that market mechanisms and marginal pricing will continue to apply.
In our opinion, these proposals address the key concerns raised during the policy debate. In particular, they avoid
- artificially restricting the spot price,
- distorting power plant dispatch decisions, and
- increasing gas consumption (as happened in Spain).
The proposals also make clear that the income cap will only apply to realised market revenues. This is necessary to avoid penalising generators who hedged their revenues against fluctuations in the wholesale electricity market at a price below the cap level. Other exemptions (e.g., for PPAs or assets selling via two-way CfDs or feed-in-tariffs) should keep market interference to a minimum. The price limit for inframarginal generation should not affect price determination but will create income that can be targeted to help reduce consumption and support vulnerable customer groups.
A detailed analysis of the price effects will follow in our updated power market outlook at the end of September.
Details of the proposal
The proposal, ‘An emergency intervention to address high energy prices’, contains four main elements:
1. Reduced power consumption. To reduce the electricity price, power consumption must go down. The Commission proposes to order Member States to cut consumption by 5 percent during those hours with the highest prices, corresponding to at least a 10 percent reduction across all hours. (1) Cutting consumption during peak price hours ensures that the reduction in consumption leads to lower gas-fired generation.1 In addition, the Commission encourages Member States to cut monthly power consumption by 10 percent relative to a reference period. (2) It is up to Member States to establish instruments to realise these reductions, but the Commission requires that the instruments, among other things, must be market-based, non-discriminatory and non-distortionary. Reducing power consumption could have an effect on the overall power price.
2. Redistribution of extraordinary income from the power sector. Electricity subsidies and measures to reduce consumption must be financed. The Commission proposes to do this by collecting excess profits from so-called inframarginal generators that are price-takers in the market. Specifically, the proposals introduce a temporary income cap for these generators equal to €180/MWh. Revenues that exceed this level shall instead accrue to the national authorities.
Power generation deemed inframarginal, and thus covered by the cap, includes nuclear, solar, wind, geothermal, biofuel (excluding biomethane), oil, waste incineration, lignite and run-of-the-river hydropower.
The income ceiling of €180/MWh has been set high enough to ensure that all power-producing technologies can cover their long-term average costs. The ceiling should not, therefore, distort either short-term price formation or long-term investment incentives.
To ensure that generators with long-term supply agreements at prices below the spot price are not inadvertently penalised, the income ceiling will apply to realised income. In addition, it will cover all power markets (spot, intraday etc.) to foreclose avoidance.
The required reduction in power consumption and the income ceiling for inframarginal generators will apply from December 1st 2022 to March 31st 2023. The Commission will submit a status report on the power market by the end of February. Based on the findings in this report, the Commission will submit proposals on any extension of and/or changes to the consumption reduction and income ceiling measures.
3. Redistribution of extraordinary income from the oil, gas and coal sectors: Many oil, gas and coal suppliers are also earning excess profits. The Commission proposes that Member States collect part of this income from these companies and use it to finance electricity subsidies, consumption reduction and investments in renewable energy and energy efficiency. The proposal is referred to as “[…] a temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors […]”.
Through the temporary solidarity mechanism, Member States must collect 33 percent of any profits exceeding 20 percent of the average profit level over the previous three years for businesses within the oil, gas and coal sectors.
The Commission must submit an assessment of these redistribution efforts by 15 October 2023.
4. Extended possibility to protect small and medium-sized enterprises: Commission will also temporarily allow Member States to use the following options to protect consumers against high electricity prices:
- Regulated end-user prices for small and medium-sized businesses
- Regulated end-user prices that are lower than the cost of the energy delivered (for a limited volume and provided that incentives to reduce demand remain).
The Commission’s proposals are a ‘council regulation’, meaning that EU Member States will adopt or reject the regulation through the European Council without the involvement of the European Parliament. The decision is likely to be made at an extraordinary meeting of EU energy ministers on 30 September.
Impact on Norway
The proposal is not ‘EEA-relevant’ and is therefore unlikely to be directly applied in Norway. However, if the plan is adopted and has the desired effect, it is likely to reduce prices in southern Norway as a result.
Talks are taking place about whether and how Norway can contribute to reducing gas prices. One solution could be that long-term contracts are entered into at a price level that reflects long-term prices. This will probably mean lower gas prices in the short term.
The expanded options to set lower prices for small and medium-sized businesses will likely also increase the Norwegian authorities’ room for manoeuvre in providing support to Norwegian businesses.
(1) The Commission defines ‘peak price hours’ as: “[…] hours of the day where day-ahead wholesale electricity prices are expected to be the highest, based on forecasts by transmission system operators and nominated electricity market operators;”
(2) The reference period is defined as: “[…] the period from 1 November to 31 March in the five consecutive years preceding the date of entry into force of this Regulation, starting with the period from 1 November 2017 to 31 March 2018;”
