The European Commission is working on a €200 a megawatt hour price limit for electricity generated by non-gas power producers as part of efforts to quell the EU’s energy crisis.
In draft proposals seen by the Financial Times, the commission said it recommended member states cap the price of electricity from producers such as wind farms, nuclear and coal plants, all of which are set by the high price of gas, at €200 a MWh.
The current spot price for electricity in Germany, the regional benchmark, is above €450 a MWh. Wholesale electricity prices have skyrocketed because they are pegged to the price of gas, whether or not the electric power is produced with gas or by other means. Gas prices are roughly 10 times higher than they have been compared with averages over the past decade.
Such a cap would mimic “the market outcomes that could be expected were global supply chains functioning normally and not subject to the weaponisation of energy through gas supply disruptions”, the commission document said.
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Henning Gloystein, director of energy and climate at Eurasia Group, said a €200 a MWh limit was “sufficiently high to achieve the intended demand reduction in Europe this winter, while giving industry and small consumers at least some assurance that coats won’t spiral up further”.
It should, he added, also provide producers of low-cost renewable energy with enough profit margin to incentivise investment, something that Brussels is keen to encourage in its efforts to tackle climate change.
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Anything that energy companies earned above the cap would be collected by governments and funnelled back to consumers as they saw fit, the document said.
Europe has seen a squeeze on natural gas from Russia, previously its biggest supplier, in response to western support for Ukraine. The Kremlin warned on Monday that supplies through the critical Nord Stream 1 pipeline, the largest between Europe and Russia, would be curtailed until western sanctions were lifted.
European industries have warned that they face an “existential threat” unless policymakers intervene to ease energy costs.
Proposals are set to be discussed by diplomats from the EU’s 27 member states on Wednesday ahead of an emergency meeting of energy ministers on Friday.
The document also suggests a mandatory target of reducing electricity consumption by 5 per cent during peak pricing hours — something that commission president Ursula von der Leyen put forward in prepared remarks seen by the Financial Times on Tuesday.
A common way to encourage industrial users to decrease peak power usage is via contracts that allow power distributors to reduce supply in exchange for compensation or lower future bills.
The commission’s paper warned that the incentives used must be “cost-effective”. It also said that member states must act jointly so as to avoid distortions in the EU’s internal market.
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Several member states have complained that Brussels has not acted fast enough. European Council president Charles Michel said in an interview on Saturday that the commission had “not a day to lose”.
EU capitals are generally in favour of plans to encourage reductions in demand as the fastest way to tackle the crisis, but are split on how to address spiralling energy prices.
Several nations, including Italy, Spain and Austria, have called for a separation of the gas and electricity markets, while others favour limits on gas prices.
One EU diplomat warned that caps on wholesale gas, however, could “have negative consequences” if the prices go down. The diplomat added that it would be better to have dynamic limits set relative to energy markets outside the EU.
Brussels is also looking at ways to set an alternative benchmark for gas prices other than the commonly used Dutch Transfer Title Facility, a trading exchange that has been affected by bottlenecks to gas flows in northwestern Europe.
The commission declined to comment. — Copyright The Financial Times Limited 2022
