The EU has approved this Friday to intervene in the electricity market. And what does it mean? Put limits on extraordinary business profits and mandatory reduction of electricity consumption at peak hours. Thus, in line with what was proposed on September 13 by the European Commission, the 27 EU Energy Ministers have agreed on three measures: the obligation to consume 10% less electricity –5% during peak hours–; a minimum tax of 33% for the super profits of fossil fuel companies and a maximum cap of 180 euros megawatt/hour for inframarginal energies.
Inflation in the euro zone reaches a new record in September and reaches 10%
The text approved by the ministers this Friday in Brussels will be formally adopted by written procedure next week. It will then be published in the Official Gazette and will enter into force the day after publication.
As approved by the ministers, a lot of flexibility is left to the member states. That means, according to the sources consulted, that the tax on energy companies that is being processed in Spain does not present problems of incompatibility with what was agreed this Friday, in the same way that the Spanish system for inframarginal companies would also be compatible, while the 180 euros would be a maximum limit, not a minimum. And the mechanism that has been applied in Spain for a year provides for a 90% reduction in price from 67 euros megawatt/hour.
Brussels has estimated at 142,000 million euros what the States can collect with the caps on the super profits of the inframarginal industries –nuclear, lignite and renewables– and the fossil fuel industries.
“The proposed measures are of an extraordinary nature and, therefore, must have a limited duration”, says the European Commission: “The electrical emergency tool must be applied no later than December 1, 2022 and until March 31, 2023 The European Commission has committed to carry out a review of the electricity emergency tool before February 28, 2023, taking into account the situation of electricity supply and electricity prices throughout the EU, and present a report on the main conclusions of that review to the Council”.
The calls solidarity contributions from the fossil sector, that is, the rate on extraordinary benefits, “will be applied for one year from its entry into force. The Commission will carry out a review before October 15, 2023, in view of the general situation of the fossil fuel sector and the surplus profits generated, and will present a report on the main conclusions of that review to the Council.
The European Commission has calculated that member states could collect up to €117 billion a year from the proposed temporary revenue cap for inframarginal electricity producers – such as renewables.
The extra revenues collected will have to be channeled by the Member States to final electricity consumers, whether private or commercial, who are exposed to high prices. “These revenues can be used to provide income support, rebates, investments in renewable energy, energy efficiency or decarbonisation technologies”, says Brussels: “The support provided must maintain an incentive for demand reduction. Decisions about the precise distribution will be made at the national level in accordance with the principles set out in the regulation.”
The call temporary solidarity contribution based on the taxable capital gains – at a rate of 33% – obtained in the fiscal year 2022 by energy companies in the oil, gas, coal and refinery sectors in the Union could provide an estimate of around 25,000 million euros of public income, “which will be redistributed among the Member States subject to compliance with Union Law”.
“The proposals state that these benefits should go to households and businesses, including energy-intensive industries, to mitigate the effects of sustained high energy prices, reduce energy consumption and boost EU energy autonomy. ”, says the European Commission: “In addition to the revenue generated for the Member States, the reduction in demand in the electricity sector can also help reduce prices, by reducing the need for expensive gas-fired power plants to meet the demand”.
How to reduce demand?
According to the proposal, “Member States must try to apply measures to reduce the total electricity consumption by at least 10% until March 31, 2023. All consumers can contribute, also those who are not yet equipped with intelligent metering systems or devices that allow them to adjust their consumption during the day”.
Furthermore, to specifically target the most expensive hours of electricity consumption when gas generally sets the marginal price, Brussels “proposes an obligation of at least a 5% reduction in gross electricity consumption during selected peak hours, covering the least 10% of the hours of each month, where prices are expected to be the highest.
This obligation would result in the selection of an average of 3-4 hours per working day, which would normally correspond to peak load hours, but may also include hours when electricity generation from renewables is expected to is low and the generation of marginal plants is necessary to cover the demand.
“Overall”, calculates the European Commission, “this specific reduction can lead to an estimated reduction in gas consumption of around 1.2 bcm over 4 months. This represents a reduction in gas use for energy by around 4% during the winter season across the EU.”
It will be up to the Member States to identify the hours of greatest demand in their market. Member States are also free to choose the appropriate measures to meet the expected reduction in demand, as long as they comply with the relevant EU competition and electricity market rules.
Spanish “disappointment” by gas
Disappointment. This is what the Vice President of Energy Transition, Teresa Ribera, has shown upon her arrival in Brussels this Friday for the extraordinary meeting of Energy Ministers. “We are disappointed with the proposal, with the non-proposal that the European Commission has made”, said Ribera: “The Commission knows that it is a sensitive issue and has not yet found the space in which all the Member States can respond positively. Therefore, it is good that a debate is sparked that allows us to guide what to do in this regard. What does that mean? It means that today we do not come out with a definitive conclusion in a text that can be implemented immediately. But I do hope that we can come out with a very clear orientation on what we do with respect to that price, that price corridor, that index that is taken as a reference in Europe that no longer responds to reality. The TF index is no longer responding to what are the operations and the cost behind gas purchase operations, and yet it is generating enormous distortions in our prices in Europe”.
Ribera added: “It is also unreasonable for us to look the other way when there are many intermediaries and many operations that are closing at prices that have nothing to do with production costs or with the prices paid to the supplier, which is what we are seeing. Unfortunately we think that the terms in which the Commission is making the proposals today fall short of what Europe needs”.
The European Commissioner for Energy, Kadri Simson, has tried to defend her proposals: “The Commission has proposed measures to reduce energy demand and also to generate income that can be used to support people and companies in this crisis. Last time we discussed measures we can use to address gas prices. Since then, various member states have submitted their position papers, proposals and ideas. And today we will discuss them and we will also discuss the ideas of the Commission on that. As you know, I think that we cannot approach this problem in the same way towards Russia and towards our trusted partners. [como Noruega]”.
“The answer is clear,” says Simson: “We have to offer maximum prices for all Russian gas, not only for pipelines, but also for liquefied natural gas (LNG). And for our partners, with whom we can negotiate, we have to agree on price brokers. And then the Commission is also ready to develop a Europe-wide price cap for natural gas used for power generation. But we must bear in mind that the consequences cannot be an increase in the demand for gas, because we are still facing supply problems”.