Energy crisis: the political saga continues

Today, energy ministers reconvened for a second time in three weeks to discuss the ongoing energy crisis. Just over two weeks ago and less than a week after the first Council, the European Commission , under intense political pressure to reduce energy prices, proposed a series of emergency energy market interventions during the State of the European Union (SOTEU) address. As this goes to publish, energy ministers have now reached a political agreement on the interventions in the second round of discussions.

Which proposals are, and aren’t, on the table?

During her SOTEU address, Commission President, Ursula von der Leyen , announced bespoke solutions to combat astronomical energy prices. Alongside sensible ones to relieve cash liquidity pressure on power companies engaged in hedging and reduce electricity demand, a series of more controversial measures were unveiled. Chief among these is a scheme that will impose a revenue cap – a so-called inframarginal revenue cap – of €180/MWh on non-gas power generators. As an outcome of the meeting, the cap was approved by energy ministers, as part of a political agreement that also saw agreement on moderation measures.

Noticeably missing from the table, however, is what should be the main course: a cap on wholesale gas prices. It has been shown time and again that the high price of electricity is being driven by the cost of gas (see our chart from #PowerBarometer22 below). Unfortunately, on Wednesday, the Commission kicked any action on gas prices down the road to at least next week. Meanwhile, 15 countries have called on the Commission to act, and in an FT article this week, our Secretary-General, Kristian Ruby , said just as much.

Criticism

From our own analysis, we see some fundamental problems with the agreed proposals and the omission of others. We are not addressing the disease causing the high prices, but rather treating the symptoms of them. It is regrettable that no attempt has been made to introduce a price cap in the gas market, but it has been in the electricity market, introducing the risk of pummelling investor confidence in the energy transition. This is the exact opposite of what we need to happen and risks seeing capital flight away from clean energy projects that reduce our reliance on imported Russian gas. This is no longer simply a climate argument, but also a security one.

On top of this, the cap on inframarginal revenues is but an extraneous solution. Brussels expects to collect €117bn from the cap to redistribute to vulnerable customers. However, this assumes that electricity producers have high exposure to day-ahead market prices, when in fact, some 80% of generation on a given day has already been sold at a fixed future price sometime earlier. This means the Commission could have significantly overestimated the revenues the cap will generate.

This dynamic makes two additional points clear. The first is that the supposed benefit from the intervention may be much smaller than the cost manifested from the uncertainty that now surrounds investment in clean energy projects. The second is that it exposes the asymmetrical treatment of the electricity sector compared to the solidarity contribution scheme targeting extraordinary profits of the fossil fuel industry, where only €23bn is expected to be collected.

What ought to be done?

In short, we ought not to scare investors away from the energy transition but rather cure the disease, not the symptoms. To contribute fully to the debate, and avoid counterproductive policymaking, we published a position paper that provides detailed technical input on the cap, outlining the structural problems with the proposal and introducing several adaptations for the regulation. Unfortunately, many of these recommendations were not taken into consideration.

First, the EU-level proposal should restrict Member States from extending or introducing their own national schemes. Second, the price cap should consider all revenue streams available to generators across all timeframes, not just day-ahead prices, and across transactional instruments, in order to work out a net-revenue value accordingly. This refined system should also be accompanied by guidance as to how exactly it will be implemented, with proper agency given to producers for self-assessment and regulators for auditing. Finally, technologies with high variable costs should be exempt from the cap to avoid further distortion to the merit order.

From individual citizens all the way to the top echelons of government, Europe is feeling the crunch of the energy crisis. We know that something needed to be done, but this proposal will not adequately address the problem and leaves the door open for the issue to linger. Coming up is a technical workshop scheduled for 4 October between Member States and the Commission to discuss the implementation of the cap. It is crucial that the guidance document that comes from this takes the aforementioned recommendations into account to ensure that market revenues are properly estimated, and the cap properly implemented.