Explained: EU's plan to tackle winter energy crisis

explained
Explained: Eu's Plan To Tackle Winter Energy Crisis Explained: Eu's Plan To Tackle Winter Energy Crisis
The EU wants to cushion consumers and industry from soaring energy bills. Photo: Charly Triballeau/AFP via Getty
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By Kate Abnett, Reuters

The European Union will unveil a package of measures this week aimed at pulling down surging gas and power prices that are stoking record-high inflation, hampering industrial activity and inflicting sky-high bills upon citizens ahead of winter.

At the start of this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a string of supply cuts, which Moscow blames on Western sanctions imposed over its invasion of Ukraine.

The European Commission is due to set out the EU proposals on Wednesday and governments can then thrash out the details, possibly approving them at a September 30th meeting of energy ministers.

Here is what's in a draft of the European Commission's upcoming proposals, seen by Reuters.

Windfall levy

The draft EU proposal would claw back revenue from electricity generators that do not run on gas and require governments to spend the cash on cushioning consumers and industry from soaring energy bills.

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In the EU system, gas plants often set the price of electricity. Non-gas fuelled power plants sell their electricity at the resulting high prices – even though they do not have to pay huge bills for gas.

Brussels wants to skim off any excess revenue that wind, solar, nuclear and biomass plants make under this system, according to the draft, which could change before it is published.

The measure would apply a price limit per megawatt hour on the revenue these generators get for their power in the market. The revenue cap would be applied after power transactions are settled, so it would not directly affect prices in Europe's exchange-traded electricity market, the draft said. It would exclude revenues made from government subsidy schemes.

Coal plants would not be covered because their fuel costs have also increased sharply this year, the draft said.

A draft of the proposal, seen by Reuters on Tuesday, included a €180/MWh revenue limit – lower than the €200/MWh included in a previous draft.

That would cap generators' revenues at less than half of current market prices. Germany's front-year electricity price hit a record high of more than €1000/MWh last month and is currently trading at around €460/MWh.

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Industry groups say most of Europe's wind farms are not reaping windfall profits from high energy prices because they sell their power under fixed-price contracts, many of them government support schemes – raising questions about how much money the EU measure would raise.

Profit sharing

Companies that have made bumper profits from selling fossil fuels at record prices would be required to make a financial contribution to help citizens and industries grappling with sky-high bills, under the EU's draft plans.

EU countries would introduce a temporary windfall profit levy for oil, gas, coal and refining companies established in the EU. It would apply to 33 per cent of these firms' "taxable surplus profits made in the fiscal year 2022", according to the draft.

Countries including Italy have already introduced a windfall profit tax on energy firms. The draft said Brussels would put in place a minimum rate for all EU countries, but governments could choose to go higher.

Electricity demand cut

The draft EU proposal would impose a mandatory target for countries to cut electricity consumption this winter, to ensure Europe has enough fuel to last the colder months.

EU gas storage is now 84 per cent full, exceeding the EU's pre-winter filling target. But analysts say Europe will still need to slash gas use over winter, to avoid storage facilities running dry. EU countries have already agreed to curb their gas demand this winter – and electricity use could be next.

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EU countries would be required to curb their power use by 5 per cent during the 10 per cent of hours with the highest electricity demand each month, the draft said – a move it said could curb gas use in the power sector by around 4 per cent over a four-month period.

Emergency liquidity

EU countries have also tasked Brussels with designing "emergency liquidity instruments" to help energy companies facing soaring collateral needs.

Utilities sell some power in advance to secure a certain price but must post a cash deposit with exchanges in case they default before the power is produced. Soaring power prices have meant firms must post bigger margin deposits, leaving some struggling to find the extra cash.

EU officials said plans for emergency liquidity support were still being drafted, and would likely be published later than Wednesday. A note published by the Commission last week mentioned some options that EU policymakers are exploring.

"This might involve accepting a wider range of assets as collateral for margining purpose, facilitating collateral transformation, bank guarantees and, as a liquidity provider, involve state guarantee schemes to support such liquidity mechanisms," the Commission note said.

No gas price cap

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

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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 trading.

Germany, the Netherlands and Denmark oppose a general gas price cap, warning that it could leave countries struggling to attract supplies in price-competitive global markets, and endanger Europe's winter energy security.

Italy and Poland are among the supporters that say capping gas prices would pull down bills for citizens and industries.

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

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