The EU Commission has proposed a plan that would pull in €142 billion in windfall profits earned by power and fossil fuel companies and redistribute it to hard-pressed consumers who have seen their power costs multiply in recent months.
The EU Commission has proposed a plan that would pull in €142 billion in windfall profits earned by power and fossil fuel companies and redistribute it to hard-pressed consumers who have seen their power costs multiply in recent months. At the same time, the European Union aims to cut power use through a mandatory 5% reduction in peak-hour demand. The overall target is a 10% cut in total electricity demand until 31 March 2023. In Rystad Energy’s view, these temporary measures should go a long way in helping the EU’s population through the winter while avoiding some of the detrimental effects of other alternatives that have been discussed in recent weeks. Even so, many details need to be worked out for the plan – if approved – to be effective.
Enforcement of the demand measures will be a real test of Europe’s resolve – thus far, despite the high energy costs, overall European power demand is down just 2% and in the highest-price month, August, demand was just 1% lower than the previous year. The scale of the proposed 5-10% reduction should therefore not be underestimated. It will be a monumental task for households, businesses, and the wider economy to achieve demand cuts of this scale. Ultimately, the reward would be a noticeable effect on power prices as the overall pressure on supply will be eased.
The second measure of a temporary market cap for infra-marginal technologies is also an extraordinary initiative never seen in the liberalized European market. Power generation technologies with lower generation costs than natural gas – including renewables, nuclear, and lignite – would get their revenues capped. Some companies generating power from these sources have had the possibility to generate exceptional revenues in recent months, as their power generation costs have remained relatively stable while wholesale power prices have surged. The commission wants to set this cap at €180 per megawatt-hour (MWh), and the surplus becomes “public revenue”, which under this measure would be distributed to electricity consumers.
Considering the current crisis, these proposals seem like a sensible choice, as they seek to balance the market forces while also taking care of the consumers. Many consumers will struggle to make ends meet without any form of compensation through the winter, and the EU is addressing this head-on with these new measures. By highlighting that all the measures are temporary, the EU is also hoping and emphasizing that this would not become a “new normal” and the market will be allowed to return to its usual dynamics once Europe is through the winter.
This is the single largest intervention by the EU in its energy markets since its inception. The redistribution of revenue and cuts to energy demand will require enforcement, but with this plan, the EU is taking a decisive step in helping its population and industry through the winter months. Despite the unprecedented size and scale of the intervention it is designed to be short term and does not address longer term supply issues. The stage is set for bigger and potentially more forceful interventions as Europe continues to decouple its energy supply from Russia.