Monday, June 5

price caps, joint purchases and compensation to producers

  • The European Commission presents this Wednesday its battery of options to cushion the rise in prices in the short term in homes and companies

  • It also proposes a regulation that establishes a mandatory level of gas storage of 90% by November 1 to increase autonomy.

During the last twelve months the retail gas prices have shot up 65% and 30% those of the electricity and the Russian invasion of Ukraine it has only added more pressure to a highly volatile market. A situation that countries like Spain, Italy, Greece or Portugal They have been denouncing for months due to the impact on homes and businesses. The emergency plan designed by the European Comission to respond in the short term to the rise in electricity and gas prices, which will be presented this Wednesday on the eve of the Summit of Heads of State and Government which is celebrated on March 24 and 25, includes a “Option menu” with compensation to consumers, caps on gas and electricity prices and joint purchases of gas and hydrogen at the international level.

“We think that there is enormous volatility in the electricity market due to high gas prices, the impact of which is detrimental to the competitiveness of European industry and better solutions must be found,” explained the Vice President of the Commission on Tuesday, Maros Sefkovic, after the meeting held by the ministers of European affairs to prepare the energy debate for the next summit. Brussels’ intention is to open a discussion on “the best possible options” although, as the eraser consulted by EL PERIÓDICO, “none of them offers a magical solution” and “all have advantages and disadvantages” given the “diversity” of the situation in the Member States.

The document mentions direct aid to consumers, particularly the most vulnerable, and discounts on VAT on gas and electricity, a path that many Member States have already followed, although the European legal framework offers, according to Brussels, possibilities that have not been fully exploited, “including exemptions for households.” This is a financially costly solution although Brussels suggests that Member States could use the energy taxes, income from the CO2 emissions trading regime or a possible tax on the profits of some electricity companies to finance this type of compensation. The plan also includes the possibility of purchases of electricity through a “public entity” that governments could create to buy on the market and resell electricity to the most vulnerable consumers at lower prices.

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The menu also includes the ability to set wholesale electricity price caps although this option would require a “strict” regulation to guarantee that the “financial compensations” to the electricity companies, for the difference in price, are reasonable. Among the negative effects, according to Brussels, is the possibility that electricity companies divert their production to third countries without price caps, so that electricity subsidized by the EU could end up benefiting third countries instead of European consumers. Refering to gas price intervention, the origin of the high electricity prices, the menu also includes the option of modulating the price or setting a ceiling, although to be effective the measure “would have to be implemented by all the Member States”. Among the challenges of this measure is establishing the appropriate level. “If it is set (a cap) too low it would be difficult to attract more gas to Europe and could encourage European companies to export gas to countries with higher prices,” warns the Commission. A lower price could also promote higher consumption while consumers with long-term contracts with price levels above the cap would not benefit from the measure until their agreements expire.

The menu also mentions joint purchases at European level of liquefied natural gas (LNG) and gas, with the aim of strengthening the EU’s position vis-à-vis global suppliers, in the style of the strategy followed to acquire vaccines against covid-19. “The EU can best secure affordable LNG, gas and hydrogen from third countries in the short term by engaging with them in the long term, establishing profitable long-term gas partnerships that also lay the groundwork for future import of hydrogen”, justifies the Executive. The idea would be to create a high-level group responsible for determining the needs of the Member States, monitoring efficient use of the terminals and storage facilities and paving the way with key suppliers from the Mediterranean region, Africa, the Middle East and the United States. Subsequently, a negotiating team, led by Brussels, would be in charge of bringing the negotiations to a successful conclusion

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In addition to the menu of options, Brussels will also propose this Wednesday a strategy to improve gas storage in Europe with a view to reducing dependence on Russia and improving its autonomy in the face of any problem that may arise in the future. To this end, it proposes that all storage infrastructures be mandatory to 90% of its capacity (currently at 26%) by November 1 of each year. The proposal sets different intermediate filling targets for each Member State for the months of April, June, August and October.

The document also suggests a trajectory by Member State. According to it, Spain would have to reach gas reserves of 63% in May, 69% in June, 74% in July, 79% in August, 85% in September, and 90% by October. As of 2023, the European Commission would be in charge of adjusting the trajectories through a delegated act. Member States that do not have storage depots will have to close agreements with operators from other EU countries. Furthermore, given that this is critical infrastructure for European security and that many deposits are in the hands of companies such as Gazprom, the proposal also introduces provisions and safeguard measures.

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