The European Union is preparing emergency plans to cap the price of gas and unbundle it from electricity, as well as longer-term reforms to ensure the price of electricity reflects the lower cost of renewable energy.
EU energy ministers will meet on September 9 to discuss how to urgently reduce the burden of energy prices on businesses and households.
Energy prices in Europe have skyrocketed over the past year under pressure from record gas prices after Russia gradually cut gas supplies to the Old Continent.
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European governments accuse Moscow of using blackmail energy in response to Western support for Ukraine under Russian aggression. Gazprom claims that the reduction and suspension of gas supplies is due to sanctions and technical problems.
Changing the energy system of the 27 member states is a long and complex process, and politicians are trying to find a short-term solution. Reuters summarizes what energy market reform decisions could be made in the coming days and what they could lead to.
Why is the price of electricity linked to that of gas?
In the European energy system, the price of wholesale electricity is determined by the last plant needed to meet demand.
Wind, nuclear, coal and gas plants, as well as any other power generators, bid on the energy market, with the lowest bidders coming first, and the more expensive ones, such as gas, coming next. Gas plants are often the ones that set the final price.
The idea is for everyone to sell electricity at the same price and for cheaper renewable plants to earn more, spurring investment in exactly the kind of energy capacity Europe needs to meet its climate goals.
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But some countries, such as Spain, consider the system unfair, as end users pay the same price for both high-cost and low-cost electricity.
Gas prices rose after Russia cut volumes supplied to Europe and demand on world markets jumped sharply. As a result, the price of electricity produced by burning gas skyrocketed.
In late August, electricity futures for January in Germany jumped to 1,050 euros per megawatt hour, up 14 times from a year earlier. Subsequently, however, prices fell.
There are other factors behind the rise in electricity prices, such as problems at French nuclear plants and a severe drought in Europe that has reduced hydropower capacity and affected coal deliveries by river.
How can the EU change energy prices?
European Commission President Ursula von der Leyen said recently that the EU should separate the price of electricity from that of gas, without giving further details.
A Commission draft document seen by Reuters last week revealed that the EU’s proposals include capping the price of electricity from certain non-gas-fired plants.
The surge in prices has led to excess profits for some lower-cost plants, such as wind and nuclear. The EU believes that member states should use the price ceiling to seize these profits and use them to support consumer bills.
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The Czech Republic, which currently holds the EU’s rotating presidency, has submitted proposals for discussion by energy ministers when they meet on Friday.
These include capping the price of gas imported from certain countries, capping the price of gas used to produce electricity, or temporarily removing gas-fired power stations from the European electricity pricing system.
The idea of capping the price of gas or electricity has long been supported by Spain, Belgium and other countries, including the previously hesitant Austria and Germany. France is among the countries that want the price of gas to be separated from that of electricity.
There is also an idea proposed by Italian Prime Minister Mario Draghi for EU member states to impose a ceiling on the price of gas imported from Russia. Opponents of the idea say it could lead Moscow to cut off all supplies to Europe.
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Another option is for the member states to set a ceiling on the price of gas and to pay companies the difference between the ceiling and the real market price. Germany and the Netherlands have until recently opposed the idea, as it would effectively provide subsidies with public funds for fossil fuel power generation. According to them, it is better to use these funds for the transition to cheaper and cleaner energy.
The Czech proposals also include temporarily restricting electricity trading on European exchanges to daily and “day-ahead” auctions. Other ideas envisage limiting the access of financial speculators to the gas markets and creating a parallel market for electricity produced by gas, separate from the current electricity market.
What are the potential drawbacks?
High gas prices are an incentive for businesses and households to limit gas consumption. Governments are trying to encourage such a change in behavior to have enough fuel for the winter.
Capping the price of gas would remove that incentive and could even encourage consumers to use more gas as governments seek to reduce consumption, critics say.
Analysts are of the opinion that financial support for low-income households and businesses, which are most affected by high prices, is a better policy than a hasty change in the structure of the market.
The question of how to cap the price of gas without forcing gas-fired power plant operators to curtail production at a time when most countries need more and more electricity also remains open.