According to draft plans circulated to the European Commission, the European Union could establish a maximum price for electricity generated by nongas producers, such as renewables and nuclear. This would help to increase revenue and lower power bills.
This measure should be accompanied with an EU-wide plan for reducing electricity demand. It should be similar to the 15% gas reduction program. Arrangements reached before the summer break.
These ideas were found in a leaked non paper Reuters and other media outlets, do not constitute an official policy announcement and are set to be discussed by EU energy ministers when they gather next Friday for an emergency meeting.
Although it is not clear how much, the Commission believes that both the price cap as well as the consumption demand plans can be quickly implemented to provide immediate relief to the economy.
The leak comes just days after European Commission President Ursula von der Leyen pitched an “emergency intervention” in the electricity market to tame the spiralling prices that are putting households and companies under extreme financial stress.
She also spoke of a structural reform but in the long term.
The Commission chief will deliver her annual State of the Union address, which will be delivered on 14 September. She is expected to reveal further details about solutions to the worsening energy crisis.
“The skyrocketing electricity price is now exposing, for various reasons, the limitations to our current electricity market design.” Von der Leyen stated Monday.
“[The market]It was created under completely different circumstances and for completely separate purposes. It is no more suitable for the purpose.”
Marginal pricing is under scrutiny
Von der Leyen made a public statement referring to the marginal pricing model that currently governs the liberalised electricity markets.
Under this system, all electricity producers – from wind and solar to fossil fuels – bid into the market and offer power according to their production costs. The bidding starts from the cheapest sources – the renewables – and finishes with the most expensive ones – in this case, gas.
Because most EU countries still rely heavily on gas to supply their electricity, the final price for electricity is often set by gas. Even though gas can be found in cleaner, more affordable sources, it is still the main source of electricity.
The system was initially praised for boosting transparency and promoting the switch to green energy, but Russia’s invasion of Ukraine has created unprecedented instability.
Gazprom, Russia’s state-controlled oil giant, continues to manipulate the supply, putting investors on edge. This has led to rampant speculation. Record-breaking prices.
Von der Leyen stated, “We need a new market for electricity that actually functions and brings us back to balance.”
Her executive rejected more extreme ideas like a cap on all electricity, subsidies to carbon emissions permits, or a suspension of wholesale markets.
Instead, it suggests a more targeted cap for non-gas producers – wind, solar, hydro and nuclear power – who have seen a surge in profits under the market design determined by gas.
Governments could make additional revenues from the difference between the final electricity price, and the agreed-upon cap. The funds could be used to support the income of the most severely affected households and companies.
The price cap would not fit with the windfall taxes that have been imposed on energy companies by countries like Spain or Italy in recent months, warns the Commission. These exceptional measures are more extensive.
Executive also dismissed the possibility of applying the Iberian model – a subsidised cap on gas prices – to the entire EU market, fearing it would incentivise a higher consumption of gas across the bloc.
Experts agree that marginal pricing is still the best market model in normal times. Any intervention should be precise, time-limited, and specific. They believe that energy savings are the best tool to help the EU make it through winter season safely.
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