Ursula von der Leyen, President of the European Commission offers an unprecedented intervention on the European energy markets on Wednesday to bring down the prices of electricity and natural gas:
- Cap the price Europe pays for Russian gas.
- Cap the prices of electricity produced in non-gas power plants.
- Mandate energy conservation during peak hours.
- Tax on windfall profits made by energy companies to fund relief for small businesses and households.
Russia immediately threatened to cut off all energy supplies if member states agreed to the plan.
The Netherlands, which has led opposition to a general cap on gas prices, could support one for Russian gas.
The Czech Republic, which holds the rotating EU presidency, remains skeptical. Industry Minister Jozef Síkela told reporters on Friday that a council of European energy ministers would consider only two proposals: decoupling electricity and gas prices and capping electricity produced in non-gas power plants. (The second requires the first.)
What to cap
Europe imported about 40% of its gas from Russia before the escalation of the war in Ukraine. That share has fallen to 20% this year and 9% this summer, according to Von der Leyen. A ban on Russian oil is expected to come into effect in February.
Central European countries that depend on Russian gas pipeline flows through Ukraine have argued for a price cap on all imported natural gas. It might just persuade Vladimir Putin to keep the gas flowing, but it might also convince liquefied natural gas exporters, like America and Qatar, to sell to Asia.
Italy would go further and completely cap natural gas prices in the EU.
European policy reports that the Spanish solution to subsidize gas consumed by power stations lost its appeal in Brussels after it emerged that Spanish gas consumption had increased over the summer. This would seem to confirm Dutch fears that the price cap would discourage energy conservation. Although in the case of Spain, the lack of hydroelectricity and the increased use of air conditioning due to unusually hot weather played a role.
Prices pushed up
The gas shortage has been made worse by governments buying gas on the wholesale market to fill storage sites for the winter, pushing prices to skyrocketing levels.
Gas was trading at nearly €350 per megawatt hour on the Dutch benchmark market in August. Prices stabilized at €240 to €250but that still represents an eightfold increase from a year ago.
Electricity prices are also on the rise. The Netherlands get 46% of their electricity from gas combustion, Italy 51%. Even in countries that depend on coal, nuclear and renewable energy, the high price of gas makes electricity more expensive. This is because the wholesale price of electricity is determined by the most expensive source needed to meet demand, and that is gas, because gas-fired power plants are easier to turn on and off than others.
Hence the Commission’s proposal to cap electricity prices excluding gas and to tax windfall profits. Coal, nuclear and renewables have become extremely profitable while businesses and households have never seen their energy bills increase.
But capping certain prices, taxing profits, and using the revenue to subsidize consumers is a backdoor way to fix a broken market.
The central problem is that we are moving closer to a single market for energy consumption and distribution in Europe, with integrated networks and retailers operating in several countries, while production and generation remain under national control. And Member States have followed contradictory strategies.
Different visions of nuclear and gas
When Germany decided to phase out coal and nuclear simultaneously, it doubled its consumption of natural gas and exported the damage. Natural gas drilling has caused earthquakes in the Netherlands and methane pollution in Russia. Methane is 25 times more potent than CO₂.
Germany has agreed to build the Nord Stream gas pipelines in the Baltic Sea to become independent from gas transit countries in Eastern Europe. Now that Russia has stopped pumping gas via Nord Stream, Germany finds itself at the mercy of its eastern neighbors, who still get gas from Russia, and international energy markets.
Unlike the Netherlands and Spain, Germany has not built terminals to import LNG. He hastened to rent five mobile platforms. He’s asked the Dutch for more gas, but they’re in no mood to risk more earthquakes, especially when – even now – Germany won’t keep two of its three remaining nuclear reactors online beyond that. of spring.
Germany is not the only country where domestic politics prevail. Despite appeals from Berlin and Madrid, France refuses to connect a gas pipeline which ends in the Pyrenees of Catalonia and which could bring more gas from North Africa. The French argue that the billions of euros needed to connect the Midcat gas pipeline to the European grid are not worth it, and that Europe should become less dependent on fossil fuels anyway. France gets 70% of its electricity from nuclear power plants.