Can the EU agree on a plan to alleviate the energy crisis?

Just days after Russia said it would not restart gas flows through a critical pipeline to Europe, the bloc’s energy ministers backed comprehensive plans to cap prices on all imports from gas and a tax on electricity producers.

But, at an emergency meeting late last week, they struggled to agree on details. They have yet to decide whether to cap the price of all imported gas or just supplies from Russia and how to establish a mechanism to skim windfall profits from energy companies benefiting from record prices.

As European Commission President Ursula von der Leyen is expected in her annual State of the Union address on Wednesday to focus on energy, bureaucrats are trying to find common ground between the 27 member states to avoid power outages and financial hardship for businesses and consumers this winter.

Fredrik Persson, chairman of industry body BusinessEurope, said “Tackling soaring energy prices and finding ways to mitigate them is an urgent matter of survival for European industries and households”.

Why is the EU acting now?

Moscow’s announcement on Monday that gas supplies would not be restored through the Nordstream 1 gas pipeline until sanctions imposed after its invasion of Ukraine were lifted raised fears of a complete Russian gas cut.

Last year, the EU imported about 155 billion cubic meters of Russian gas pipeline, about 40% of its total supply. This figure has now fallen to 9%, with reduced flows still reaching Europe via Turkey and Ukraine. The supply squeeze has helped push prices up to about 10 times their average over the past decade.

EU gas storage levels have reached 83% of total capacity, well ahead of the 80% target set for the end of October, raising hopes that there will be sufficient supply this winter.

But there is always pressure on politicians to find solutions to the crisis. Many businesses in energy-intensive sectors such as fertilizer production and steel have already closed or reduced production, while households are having to cut back on basic expenses such as food to pay their energy bills .

What has been proposed?

The committee presented proposals on Wednesday which included suggestions to skim profits from energy companies and recycle profits back to households and businesses, a relaxation of state aid rules to bail out companies hit by energy bills high, a mandatory reduction in peak electricity demand and, more temporarily, a cap on the price of gas, including from Russia.

At Friday’s meeting, according to the Czechs, who hold the rotating European Council presidency until January, ministers agreed that Brussels should focus on four areas: reducing peak electricity demand; exceptional levies on non-gas electricity production; a wider gas price cap; and providing liquidity to power generators facing increasingly high collateral demands.

Several EU capitals have also called for a break in the link between gas and electricity prices. Others want to temporarily reduce the cost of carbon taxes that companies pay as a reward for their emissions.

How would price caps and exceptional levies work?

This is where agreement on what needs to be done fails. As for gas price caps, countries like Italy, Austria and Greece oppose a cap on Russian imports only because they fear Moscow will cut off remaining supplies.

Broader consensus was reached for a cap on a greater proportion of imports, but it was not agreed whether such a cap would be applied only to pipeline gas or to all imports, including liquefied natural gas .

Dutch Minister Hans Vijibrief
Dutch Minister Hans Vijlbrief fears that a wide gas price cap will prevent other exporters from supplying gas © Pro Shots/Alamy

Denmark and the Netherlands are among the countries that are not in favor of an overall ceiling because they fear that the fall in prices will only serve to increase consumption.

“All these large capitalizations have the disadvantage of discouraging [securing] supplies from other countries,” said Hans Vijlbrief, the Dutch Minister for Extractive Industries.

An exceptional levy on the profits of non-gas electricity producers could be structured either as a clawback of revenues or as more dynamic price limits that come into effect when prices reach certain thresholds.

There is also debate on whether the thresholds should be specific to each source of electricity generation such as coal, nuclear, wind and solar or applied uniformly, in which case more expensive fuels such as coal would be more affected.

Will the plan help consumers?

Analysts from data group Argus Insight said that while the EU’s desire to protect households from poverty was “laudable”, the “unprecedented pace of policy-making has resulted in a number of proposals which would not achieve this goal”.

Measures such as capping the price of all imported gas, for example, could induce producers such as Algeria and Norway to cut supplies, although Norway has said it is open to the idea. This, in turn, could lead to further price increases, Argus analysts argued.

But Henning Gloystein, director of energy and climate at Eurasia Group, said the combination of price caps, windfall levies and demand reduction “should actually go far enough to prevent energy costs to soar”.

Riina Sikkut, Estonia’s Minister for Economic Affairs and Infrastructure, said a mandatory electricity demand reduction “has huge potential to drive down prices, but more important than mandatory savings targets is shifting consumption from peak hours to off-peak hours”.

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