Soaring energy prices are having a major impact on Europe. This has an impact on households, who see their bills increase, but also on industry. Thus, Europe is trying to protect its industry as German industrial production fell in July.
To do this, Europe is looking for solutions. The EU is considering several solutions such as a cap on gas prices or the separation of electricity and gas prices. In an attempt to control soaring prices, European energy ministers are scheduled to meet tomorrow, September 9.
Europe faces soaring energy prices
In fact, in Europe, electricity prices are exploding. These are victims of record gas prices, a consequence of the reduction in supplies to Europe from Russia.
Europe accuses Moscow of using energy as a weapon to put pressure on the West. Moscow refutes these accusations. Gazprom blames the cuts on Western sanctions and technical problems.
In response to these soaring prices, Europe is seeking to transform energy systems. However, the task is daunting. In fact, it took 20 years for cross-border trade in energy products to emerge. Nevertheless, the EU must find a short-term solution.
Electricity prices follow gas prices
Within the EU, the wholesale price of electricity is set by the last power plant needed to meet demand. Thus, all producers participate in the electricity market. However, the cheapest sources come before the more expensive sources, such as gas. It is the economic precedence.
All producers sell their electricity at the same price. Thus, the lowest cost renewable energy producers have a higher profit margin. This encourages the production of renewable energy, in line with Europe’s climate objectives. However, some countries question this system. Spain, for example, finds the existing system unfair.
Reduced Russian gas flows to Europe and significant competition to buy non-Russian gas are leading to a price spike. Thus, the price of producing electricity from gas increases. As a result, overall electricity prices are soaring.
In Germany, the reference contract for electricity for 2023 is at a record level. It was 1,050 €/MWh at the end of August. This amount is 14 times higher than a year ago, despite a partial price decrease.
In order to better understand the reasons for the price surge, other factors must be taken into account. First, let’s mention the problems encountered by nuclear power plants in France. Subsequently, severe heat waves have led to severe droughts across Europe. As a result, hydroelectricity production is reduced. In addition, it affects coal deliveries.
How can Europe control soaring prices?
A cap on the revenues of electricity producers?
Ursula von der Leyen announces that the EU is preparing a cap on the income of non-gas-fired electricity producers. In fact, soaring prices have allowed non-gas companies to generate record revenues. Thus, the goal is to use this price cap to dedicate revenues to reducing consumer bills.
According to a draft proposal, the cap would be €200/MWh. This represents less than half of the current wholesale electricity prices in Germany. Thus, wind farms, solar farms, biomass plants, nuclear power plants, but also coal producers would be affected.
This cap would be applied after the settlement of electricity transactions, as it is for recovered revenues. In this way, the EU intends to limit the impact of such a measure on the prices of the European electricity market traded on the stock exchange.
Other proposals
Other proposals are also expected. The Czech Republic, for example, also presents options. It proposes to cap the price of gas imported from certain countries. In addition, it advocates for a cap on the price of gas used in electricity generation. Finally, Prague advocates decoupling the price of electricity from that of gas.
All these options will be discussed on Friday 9 September by the EU energy ministers. While there are many proposals, the ministers will have to find common ground. In fact, EU countries must approve the measures before they can be implemented.
Is capping prices a solution to soaring prices?
This idea is at the heart of the debate. Many European countries support such a measure. This is the case in Belgium, Spain and Portugal. Some, such as Austria and Germany, were reluctant at first, but seem to be moving towards this option.
In addition to the question of a price cap to counter soaring prices, a more specific issue should be the focus of attention: Russian gas. Ursula von der Leyen intends to propose a specific cap for this. Thus, the goal is to reduce Moscow’s income. It should be remembered that Russia, despite Western sanctions, continues to export its hydrocarbons. In fact, Russia has earned 158 billion euros since its invasion of Ukraine.
Reticence
Some EU countries remain wary. They fear reprisals from Moscow. In fact, Vladimir Putin threatens the West. This one states:
“[Plafonner les prix] would be an absolutely stupid decision. We will not deliver anything if it is contrary to our interests, in this case economic. No gas, no oil, no coal […]. Nothing.”
Thus, there is also another option to keep the prices up. Governments could decide to cap the price of gas and pay the difference to gas companies.
Once again, this option is not unanimously supported. Germany and the Netherlands were opposed to it. In fact, such an option would be tantamount to subsidizing the production of public fuels with public funds. These funds could be used to develop renewable energies.
What does Europe risk?
Soaring gas prices are prompting industries and households to reduce their consumption. In fact, governments are encouraging it. In fact, the EU will reduce its gas consumption by 15%. Thus, it is a question of limiting the risks of a shortage while a rigorous winter is expected.
However, the introduction of a gas price cap could counteract these efforts. Sources say that such a measure is likely to encourage greater gas consumption.
Thus, some analysts argue for targeted financial support instead. This should be targeted at low-income households and businesses severely affected by soaring prices.
Also, there are questions about the feasibility of capping the cost of gas-fired electricity: how do you encourage power plant owners to produce less electricity when the country is facing a shortage?
