How the EU's energy roadmap aims to avoid 'winter of discontent'

·5-min read
© AFP - INA FASSBENDER

The European Commission unveiled proposals this week to bring down the soaring price of gas and electricity across the European Union, notably by taxing power producers' excess profits.

Amid supply cuts and soaring energy bills, the bloc has tabled strategies that aim to avoid a minefield of negative scenarios that could lead to power outages, price hikes and a "winter of discontent".

EU energy ministers are to review the plans in an extraordinary meeting due to take place in Brussels on 30 September.

At the start of this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a string of supply cuts, which Moscow blames on Western sanctions imposed over its invasion of Ukraine.

So what's in store for EU residents over the coming months, and what proposals is Brussels putting forward to offset a full-blown energy crisis?

Levy on power companies

In the EU's electricity market, the price is based on the last source used to meet overall demand – often gas-fired power plants – and that is applied to all electricity operators, regardless of whether they use nuclear, hydropower, solar or other sources.

Wholesale energy prices therefore soared together when the invasion of Ukraine sent the cost of gas skyrocketing.

In response, the EU commission is calling for a "cap" on exceptional profits raked in by energy producers that use cheaper sources priced at the much higher market rate – effectively a tax, though the EU has avoided calling it such, as that would require the unanimity of all 27 member states.

According to a draft proposal from the European Commission, the cap would be set at €180 per megawatt hour. Anything above that would go to individual EU member states' coffers, to be shared out to struggling households and businesses.

EU Commission President Ursula von der Leyen believes the levy – or cap – would raise at least €140 billion.

'Ccomprehensive reform'

The commission later explained that this estimate included up to €117 billion raised from the cap on profits from non-gas electricity producers and another €25 billion from a temporary "crisis contribution" fund from major oil, gas and coal companies.

The effects of the levy, however, would vary from country to country within the EU.

In France, for example – where most electricity comes from nuclear plants and is sold via fixed-price contracts – much of the profit already goes to the government.

Doubling down on the initiative, von der Leyen also called for a "deep and comprehensive reform" of the EU's energy market that would include the separation of gas prices from electricity production from other sources.

Profit sharing for fossil fuel companies

The EU also wants companies that have made bumper profits from selling fossil fuels at record prices to make a financial contribution to help citizens and industries grappling with sky-high bills.

EU countries are considering introducing a temporary windfall tax on oil, gas, coal and refining companies established in the European Union.

In the draft proposal, this would apply to 33 percent of these firms' "taxable surplus profits made in the fiscal year 2022". The draft says Brussels would put in place a minimum rate for all EU countries, but governments could choose to go higher

Countries including Italy have already introduced a windfall profit tax on energy firms.

Mandatory cut in electricity demand

The EU proposal would additionally impose a mandatory target for countries to cut electricity consumption this winter, to ensure Europe has enough fuel to last the colder months.

EU gas storage is now 84 percent full, exceeding the EU's pre-winter target.

But analysts say Europe will still need to slash gas use over winter to avoid storage facilities running dry. EU countries have already agreed to curb their gas demand this winter – and electricity use could be next.

EU countries would be required to curb their power use by 5 percent during the 10 percent of hours with the highest electricity demand each month, according to the draft – a move it said could curb gas consumption in the power sector by around 4 percent over a four-month period.

Emergency cashflow for power companies

Von der Leyen further said that the European Commission would work on plans to help energy companies facing soaring collateral costs.

Utilities sell some power in advance to secure a certain price, but must post a cash deposit with exchanges in case they default before the power is actually produced.

This means that soaring power prices oblige companies to post bigger margin deposits, leaving some struggling to find the extra cash.

"We will work with the market regulators to ease these problems by amending the rules on collaterals and by taking measures to limit the intra-day price volatility," the EU chief said.

No price cap on gas

However, the EU's draft proposal does not include a gas price cap – an idea that has divided the bloc's member states, and which von der Leyen said the Commission was still discussing.

EU countries have asked Brussels to propose a cap but disagree on whether this should apply to all imported gas, pipeline flows or wholesale gas trading.

Germany, the Netherlands and Denmark oppose a general gas price cap, warning that it could leave countries struggling to attract supplies in competitive global markets and endanger Europe's winter energy security.

Italy and Poland are among the supporters of capping gas prices, saying such a move would pull down bills for citizens and industries.

The EU has also backed away from an earlier plan to impose a price cap on Russian gas.

Countries including Hungary and Austria had opposed that idea in case Moscow retaliated by cutting off the dwindling supplies it still sends to the EU.