EU intervenes to keep electricity market working

Gas prices have spiralled after a natural gas crunch caused by Russia cutting pipeline exports

Paris announced on Tuesday that it would switch off ornamental lights on famous monuments an hour earlier than normal. AP

The European Commission on Wednesday officially announced mandatory power consumption measures during peak hours, a cap on energy firms exceptional revenues and a windfall tax on fossil fuel producers to manage a surge in gas and power prices this winter.

The bloc's energy ministers will hold an emergency summit on September 30 to attempt to approve the measures, which were announced in Ursula von der Leyen's State of the European Union speech on Wednesday.

Gas tanks in Europe are 84 per cent full but efforts are needed to bring down consumption and prices to keep the market functioning for power and fuel.

Electricity consumption must be reduced by at least 5 per cent during peak hours, which are to be defined by individual countries. This is to avoid using expensive gas fired power plants, bring down energy prices, and reduce the risk of blackouts or rationing.

"It will be up to member states to identify peak hours and choose appropriate measures to reduce demand but the direction is clear and common to all," said European Commissionner for Energy Kadri Simson.

The commission suggested an overall voluntary decrease of 10 per cent of consumption until next March.

The commission also expects to generate up to €117 billion ($116.7bn) by collecting a portion of the exceptional profits made this year thanks to the EU's electricity pricing mechanism by power generators with low generating costs, such as renewables.

The commission wants to cap these producers' revenues at €180 per megawatt hour.

"This level still grants them a profit margin and preserves their incentive to invest," said Frans Timmermans, executive vice-president of the European Commission.

Thirdly, the EU commission will ask member states to redistribute a solidarity contribution from fossil fuel companies to vulnerable households and businesses.

The levy would be calculated on 2022 profits that are above a 20 per cent increase on the average profits of the previous three years, at a rate of at least 33 per cent.

"We’re talking about one third of the profits above 120 per cent of the average of the last three years as a minimum," Mr Timmermans said.

Ms Simson described these figures as "fair and proportionate".

"We offer member states several suggestions: from direct transfers to end users, to premiums for cutting energy use, to setting a lower price for limited volumes," Mr Timmermans said.

This contribution is expected to allow the EU to raise in total more than €140 billion, as announced by Ms von der Leyen earlier on Wednesday during her State of the Union speech.

The EU Commission is also working on ways to support energy companies, which are facing a liquidity crisis because of collaterals in cash that they must deposit for their operations. "We absolutely want to avoid a Lehman Brothers' scenario in the energy market," Mr Timmermans said.

Europe is facing an energy crisis that could lead to rolling power cuts, the closure of factories and a deep recession. Germany is looking at reactivating two nuclear power plants. AP

Why does the EU want to intervene in energy markets?

Czech Minister for European Affairs Mikulas Bek has put the spotlight on examples of the significant rise in energy prices in Europe and said gas prices had spiralled out of control.

In August, natural gas prices reached new records of €340 ($342.43) per megawatt hour, compared with €40 per megawatt hour a year ago. Benchmark electricity prices also surged by about 300 per cent this year.

The current level of energy prices has pushed eurozone inflation to 9.1 per cent in August. Companies are struggling to cope and some have already halted production.

“This alarming trend can have potentially disruptive consequences for our economy,” Mr Bek told European legislators.

Politicians fear public anger as the cost of living rises across Europe.

“The winter facing us will be long and harsh. Europeans will have to choose between eating and heating,” said French MEP Aurore Lalucq, a social democrat, during a debate on energy at the European Parliament on Tuesday.

“We are now facing a social crisis that will explode in our faces.”

What has the bloc done so far?

The European Commission has been trying to wean the continent away from Russian hydrocarbons. It imposed a partial embargo on Russian oil in July and banned Russia coal imports from August 10.

It has sought to buy gas from other countries, including Norway, the US and Azerbaijan.

EU figures show that before the war in Ukraine, 43 per cent of the bloc's imported energy came from Russia. That figure has fallen to 9 per cent over the past seven months.

Gas storage on the continent stands at 84 per cent, exceeding its pre-winter filling target, but countries will have to make efforts to reduce their consumption to avoid rationing this winter, analysts said.

In August, the commission called for a reduction in natural gas consumption by 15 per cent until next March. Several countries, including Spain and Greece, have introduced measures to slash consumption while others, such as Poland, have expressed their opposition to the plan.

The city of Paris announced on Tuesday that it would switch off ornamental lights on famous monuments, including the Eiffel Tower, an hour earlier than normal.

Olena Zelenska, the wife of the president of Ukraine, left, Roberta Metsola, president of the European Parliament, centre, and Ursula von der Leyen, president of the European Commission, arrive for the State of the Union address in Strasbourg, France, on September 14, 2022. Bloomberg

What effect have EU sanctions had on Russia?

EU foreign policy chief Josep Borrell said on Tuesday that sanctions on Russia were already having “very serious consequences” for Moscow.

Russia’s budget surplus declined sharply in August, suggesting a drop in oil and gas revenue.

“If we look at figures from January to August this year to last year, the Russian budget has gone up by 18 per cent less due to a fall in sales of oil and gas,” Mr Borrell said. “The income coming from sales of hydrocarbons has dropped tremendously.”

Mr Borrell also said that sanctions were hurting Russia’s potential to sustain its weapons and military equipment.

“If you look at the inside, the guts of a Russian tank destroyed on a Ukrainian street, you will see the tremendous amount of electronic components manufactured by European countries in those tanks,” Mr Borrell told MEPs.

“Two thirds of all civilian aircraft can no longer fly because their components come from western countries and the blockade makes it impossible for them to get the spare parts they need.”

Russian President Vladimir Putin said on Monday that his country was holding up well in the face of western sanctions.

“The economic blitzkrieg tactics, the onslaught they were counting on, did not work,” he said while chairing a meeting on the economy.