With the winter season approaching and the potential for colder weather than last year, we look at the emergency measures the EU introduced for the energy crisis to see their current status and whether they will be ready for this winter.
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Key takeaways
- A number of the EU’s measures from the energy crisis have already been made permanent. This applies to the intraday volatility limits and the LNG benchmark.
- Others are certain or very likely to cover this winter. This includes the inframarginal price cap, the voluntary demand cuts for gas and the platform for joint purchases of gas.
- There is more uncertainty around the gas price cap, but an extension is still on the cards, as is an extension for the emergency rules on permitting.
- The windfall tax imposed on fossil fuel companies shows a mixed picture, with some Member States phasing it out and some continuing.
Emergency measures
During the energy crisis, the EU put forward seven measures to deal with the spike in energy prices and to give itself more options for containing the crisis:
- The gas price cap applied to transactions on the TTF in the event of high prices.
- The revenue cap for low-cost energy sources (known as the inframarginal price cap)
- The levy on fossil fuel profits.
- The demand cuts for electricity and gas.
- Accelerated permitting for renewables.
- The platform for joint purchases of gas.
- The intraday volatility limits.
- The creation of a dedicated LNG benchmark.
Many of these proposals were introduced as emergency legislation with set expiry dates or as drafts with set expiry dates or simply as drafts that were designed to provide more medium-term solutions.
As Europe enters the winter period, let’s review these measures to determine their current status and see what lies in the toolbox for the EU in the event of another price spike.
1. Gas price cap
The gas price cap was both the most and least significant measure the EU brought in. On one level, it was a major break from the orthodox market-led approach, with the potential to seriously disrupt how energy pricing worked. Yet, at the same time, it was only approved relatively late in the crisis, and to date, has not actually been triggered.
For the cap to be triggered, the price on the Dutch TTF must be above 180€/MWh for three working days and it must be €35 higher than a reference LNG price during that same period. The cap itself is dynamic – set €35 above the reference LNG price, down to a minimum of €180/MWh. Currently the TTF is a bit above €50/MWh.
The price cap is set to expire in February 2024, meaning it will cover the upcoming winter period. There is an active discussion about whether to extend it beyond that period. Arguably if expectations are that prices will remain low enough that the cap won’t matter, then an extension could be easier to agree. Later in November, the Commission will present a proposal on whether to extend.
2. Cap on renewables and nuclear
The other important ‘cap’ for the energy sector was the inframarginal price cap. In light of higher energy prices, governments decided that lower-cost energy generators (nuclear and renewables) were making excessive profits. They therefore agreed on a revenue cap of €180/MWh, meaning any revenue earned above this price would be collected by the state.
Formally, the EU legislation on this expired in June of this year. However, 11 countries, including France, Germany and Spain, implemented the proposal in national legislation with later expiry dates (typically the end of this year). So, for much of the EU, this provision is still active.
Looking beyond the end of this year, the debate on renewing and extending this measure has been rolled into the EU’s electricity market reform. As part of its position on the reform, national governments agreed to apply the inframarginal price cap until June 2024. It’s likely that MEPs will be able to back this too. In other words, the inframarginal price cap will continue to play a role at least in the short term.
3. Fossil fuel tax
The EU also introduced a requirement for windfall taxes on companies in the fossil fuel sector. This was set at a minimum of 33% for surplus profits.
While the EU legislation limited the windfall tax to the 2022 and 2023 fiscal years (national governments could choose which one), it’s important to note that this measure was also about harmonising the approach across the EU. Before this measure was proposed, many countries were already developing national solutions and introducing windfall taxes in the energy sector. The European Commission was trying to both catch up to the reality on the ground and impose some consistency in how energy companies were being treated.
So, while energy windfall taxes in Europe are starting to drop off, many will still run with or without the EU legislation, and countries have demonstrated that they won’t wait for Brussels before taking action in this area.
4. Demand cuts for electricity and gas
The most effective measures taken to control energy prices during the crisis were those which brought down demand. While mostly voluntary in nature, emergency targets to cut consumption of gas and electricity were generally respected by national governments, which brought in incentives and public communication campaigns to encourage citizens and businesses to cut consumption.
While the electricity demand reduction targets were allowed to expire earlier this year, governments already agreed to extend the targets for gas demand cuts until March 2024, and so will certainly cover this winter.
5. Faster renewable permits
While not directly contributing to short-term energy prices, the EU also understood that it needed to boost energy supply from alternative sources to make up for the shortfall of Russian gas. To this end, emergency permitting rules were introduced which simplified and streamlined the process for deploying new renewables.
While these simplifications were largely incorporated into the reformed Renewable Energy Directive, it will take time for countries to implement it fully. To bridge this gap, some countries are pushing to extend the emergency version of the rules. The Commission should put forward its position on this later in November.
6. Joint purchases
To try to leverage its market power, the EU set up a platform allowing EU companies to aggregate their gas demand and be matched up with international suppliers. The hope was that this would deliver cheaper prices than would otherwise be possible.
There is some debate on how effective the platform has actually been. It may have delivered lower prices for those involved but only relatively small volumes have been bought via this method (around 12bcm in the first round of tendering and around 15bcm in the second).
This future of the mechanism is integrated into the hydrogen and gas markets package, two pieces of legislation that govern the rules for these sectors and which are in the final stages of negotiations. Establishing the mechanism on a permanent basis should be possible, but more ambitious plans to expand it to include hydrogen or other gases may struggle amidst resistance from national governments.
7 & 8. Volatility limits and gas benchmarks
Finally, we have two reforms to the operation of gas markets that were introduced in response to the energy crisis. These are grouped together as more technical measures.
The first concerns limits on intraday volatility. New rules were imposed on trading venues, requiring them to develop mechanisms to limit volatility, typically through price corridors.
The second is a new benchmark, designed specifically for LNG trade. This was introduced as, at the time of the energy crisis, a number of governments were concerned that prices were being distorted by the gap between pipeline and LNG gas and the use of the former as a standard benchmark for all gas trading. The hope is that buyers and sellers will shift to using the LNG benchmark as the reference in their contracts.
Both of these measures are already permanent features of the EU energy market.
Conclusion
Many of the EU’s emergency measures from the energy crisis are being maintained through this winter and could be made permanent going forwards.
This means that in the event of another spike in energy prices, we should expect EU countries to quickly act on dampening demand, collecting windfall profits and, in the most extreme scenarios, capping the price of gas.
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