UPDATED 1 Sept: The EI library in London is temporarily closed to the public, as a precautionary measure in light of the ongoing COVID-19 situation. The Knowledge Service will still be answering email queries via email , or via live chats during working hours (09:15-17:00 GMT). Our e-library is always open for members here: eLibrary , for full-text access to over 200 e-books and millions of articles. Thank you for your patience.
New Energy World™
New Energy World™ embraces the whole energy industry as it connects and converges to address the decarbonisation challenge. It covers progress being made across the industry, from the dynamics under way to reduce emissions in oil and gas, through improvements to the efficiency of energy conversion and use, to cutting-edge initiatives in renewable and low-carbon technologies.
European bids to tackle energy price crisis
21/9/2022
6 min read
Feature
Faced with an extraordinary energy price crisis, countries across Europe are considering a host of measures, including setting a mandatory target for reducing electricity use, capping the revenues of energy firms, and setting money aside to help poorer households. Brian Davis of New Energy World reports.
There is no set pattern for economic relief in the energy price crisis, and some European Union (EU) countries are dragging their feet when it comes to debate on capping Russian energy prices.
Russian President Vladimir Putin’s appalling attack on the Ukraine and the resulting rocketing energy prices has thrown many European householders’ budgets into disarray. Despite an increase in Europe’s gas storage from sources outside Russia reaching 84% of capacity in record time, energy prices continue to rise to dizzying heights.
New UK Prime Minister Liz Truss was quick to grasp the nettle with her very first Parliamentary statement. At the same time, European Commission (EC) President Ursula von der Leyen presented an ambitious set of proposals for consideration by the European Parliament which held a special emergency meeting a few days later to discuss the options. However, some EU Member States decided to delay taking concerted action and were concerned about the call for a ‘mandatory’ cap on Russian energy prices.
On the UK front
UK Prime Minister Truss announced plans to cap average household energy bills at £2,500 for the next two years from 1 October 2022, using an Energy Price Guarantee which will supersede the current price energy cap. The move comes in addition to the £400 Bills Support Scheme announced earlier this year.
Businesses, charities and public sector organisations will receive similar support for six months. This will be reviewed every three months.
Notably, Truss refused a torrent of calls for a windfall tax on energy companies with booming profits due to the crisis. Chancellor Kwasi Kwarteng is expected to reveal anticipated costs of the energy package (likely to exceed £100bn) in a fiscal statement later this month. Balanced against this are Treasury estimates that energy companies could make about £170bn in windfall profits over the next two years, which they hope will be used to support the energy transition.
A new Energy Supply Task Force is negotiating with domestic and international suppliers to agree long-term contracts that will reduce the price they can charge for energy and increase the security of supply. The UK government also made a big play about a new oil and gas licensing round which is expected to lead to over 100 new licences. Controversially, Truss is looking to lift the moratorium on gas fracking – in a marked reversal of the Conservative Party’s 2019 manifesto. This will allow developers to seek planning permission if there is local support.
The Conservative government also promised to accelerate new sources of clean energy supply like wind and solar, and will press towards 24 GW of nuclear by 2050.
Liquidity is also a key issue. An HM Treasury Energy Markets Financing Scheme is working with the Bank of England to address the extraordinary liquidity requirements faced by energy firms operating in UK wholesale oil and gas markets.
Mike Tholen, Acting CEO of Offshore Energies UK, welcomed Truss’s announcement but was concerned that windfall taxes would deter companies from investing in the UK. ‘Our industry is already paying the highest tax rate for any sector when it is trying to invest in the next generation of oil and gas, which is critical to our energy security and for powering the transition to net zero. Calls to further change the tax rules rocks the investor confidence we need to produce our own oil and gas and power the energy transition.’
‘Windfall taxes will deter companies from the UK and handicap the investment needed to deliver energy security across the board.’ Mike Tholen, Acting CEO of Offshore Energies UK
Meanwhile, across Europe
EC President Ursula von der Leyen berated Russia for being an ‘unreliable supplier’ as the Nord Stream 1 pipeline was brought to a complete halt, with Gazprom blaming further maintenance problems. On 7 September 2022, she outlined five proposals to tackle the high energy prices gripping Europe, including suggesting a mandatory target for reducing electricity use, capping the revenues of energy firms, and using the money raised to help poorer households.
First, she emphasised the need for smart savings on electricity, with a call to ‘flatten the curve and avoid peak demands’. The EC President proposed a mandatory target for Member States to reduce electricity use at peak hours. Second, von der Leyen proposed a cap on the revenues of companies that are producing electricity with low costs. Third, she called for fossil fuel companies making massive profits to invest these revenues to help vulnerable households and companies cope, as well as growing renewables investment.
Fourth, she recognised the need to address the liquidity of energy utility companies coping with such volatile markets. ‘We will help to facilitate the liquidity support of Member States for energy companies by updating the EC temporary framework to enable state guarantees to be delivered rapidly,’ she said.
Lastly, she proposed putting a price cap on Russian gas, although EU sanctions have already made a ‘significant negative impact’ on the Russian economy. Russian gas imports to the EU at the start of the war had been reduced to 9% today, von der Leyen noted. But she recognised that Putin has managed to buffer these costs through increased fossil fuel revenue which he uses to finance the war in Ukraine.
However, the meeting of EU energy ministers on 9 September, chaired by Czech Industry and Trade Minister Jozef Sikela, failed to produce a coordinated solution. According to the Euractiv press agency, views differed on whether the price cap should be applied to all gas imports or to Russian gas only. EC President von der Leyen said she was in favour of a price cap on imports of Russian pipeline gas ‘even though this is likely to escalate tensions in Moscow’.
German Economic and Climate Minister Robert Habeck suggested that a complete halt of Russian gas imports ‘would do no harm to its economy’, since Moscow had halted deliveries through Nord Stream 1 pipeline a week before.
Though there was a prevailing view that a price cap is needed, some EU Member States called for more time to ‘fine tune’ how it should be implemented. While some countries are supportive, others like Austria and Hungary are concerned about the consequences of such a measure.
Several countries, including Italy and Belgium, asked the EC to study a price cap on all EU gas imports, including LNG, which is mostly coming from the US and Qatar. However, EU Energy Commissioner Kadri Simson said a blanket price cap on all gas imports ‘could present a security of supply challenge for Europe’.
The EU executive also wanted emergency liquid instruments to ensure that market participants have sufficient collateral to meet margin calls that would address increased volatility in future markets.
At a press conference, Sikela admitted that Members States are usually very reluctant ‘to support binding measures’.
In her State of the Union address on 14 September, von der Leyen reasserted the need for EU countries to reduce electricity demand at peak hours by 5% and estimated that a cap on revenues for profit-making energy companies will raise over €140bn. She is also setting up a task force to seek reliable sources of gas and amending liquidity rules for EU power generators. A key aim is to decouple the price of gas from electricity, with a ‘deep and comprehensive reform of the electricity market’, she said.
The EU Parliament is also set to vote on a revision of the Energy Efficiency Directive, aimed at 14.5% energy savings. But resistance continues by some Member States to both the demand reduction target and the energy efficiency target. Notably, there was no mention of the call for a Russian energy gas price cap.
A further energy ministerial meeting will be held at the end of this month to address the above issues.
Recent initiatives
French President Emmanuel Macron recently called for European solidarity and specifically for Franco-German cooperation. He promised that France will send Germany the gas it lacks in exchange for electricity to cover its own shortfall.
German Chancellor Olaf Scholz unveiled a €65bn inflation relief package earlier this month, designed to get Germany through this winter, financed by a temporary tax on windfall profits made by energy companies. The latest package brings total relief to almost €100bn since the start of the Ukraine war. Among the measures are one-off payments of €300 to pensioners. The German government said it had made ‘timely decisions’ to avoid a winter crisis by filling gas stores and restarting coal-fired power plants. Germany also bailed out energy giant Uniper in the face of liquidity problems.
Meanwhile, Finland and Sweden are to offer liquidity guarantees ‘as a last resort financing option’ to power companies buckling under the strain of rising gas prices.
Poland is seeking to limit prices on all natural gas imports, notes Bloomberg.
Spain plans to expand its energy-saving policies with specific target measures aimed at certain industries. In June 2022, Spain and Portugal capped power prices under an €8.4bn scheme for six months, at €40/MWh, increasing by €5/MWh per month until 31 May 2023.
Italy aims to reduce gas consumption by as much as 8.2bn m3 between August and March next year. The plan includes increasing output from coal and other power stations and suggests shortening winter heating in homes and offices by two weeks.
Heavy energy users across Europe, in chemicals, paper and cement manufacture, are also calling on the EU to take urgent action to avoid the further shutdown of plants due to soaring energy bills.
Time will tell if plans for a Russian energy cap price will fit an EU bloc with widely contrasting needs, and where the ‘heat versus eat’ concerns are common to many vulnerable households.