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Energy crisis: Brussels unveils measures to capture energy profits but delays price cap on gas

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By Jorge Liboreiro
The European Commission will continue working on a possible price cap on all gas imports, but it's unclear when a proposal could be put forward.
The European Commission will continue working on a possible price cap on all gas imports, but it's unclear when a proposal could be put forward.   -   Copyright  Martin Meissner/Copyright 2022 The Associated Press. All rights reserved.

There will be no price cap on gas imports entering the European Union, at least not for the time being.

The EU's exceptional measures to combat the worsening energy crisis will, for now, focus on power savings and capturing excess revenues.

The Commission is still studying the pros and cons of the gas cap and will not put forward any legislative proposal until the internal assessment is completed, Euronews understands.

European energy commissioner Kadri Simson said on Wednesday that they were continuing to access the impact of a possible gas price cap on the EU's supply.

The idea of introducing an EU-wide price cap on all gas imports, beyond Russia, has gained traction in recent weeks, after August saw record-breaking prices in trading and pushed electricity bills to unsustainable highs.

Last week a majority of member states threw their support behind the gas cap, but the Commission has insisted that the possible risks need to be thoroughly considered.

The executive fears a price cap on gas would put off shippers of liquefied natural gas (LNG), a flexible and valuable commodity that could be easily re-routed to other regions in the world.

The EU has drastically ramped up purchases of LNG to compensate the loss of gas coming through Russian pipelines, which the Kremlin continues to manipulate in retaliation for Western sanctions. These extra LNG supplies are seen as essential for the EU to make it through the winter without major power cuts or rationing. 

"We're going into the talks with an open mind but are sceptical towards a maximum price on natural gas," Norwegian Prime Minister Jonas Gahr Støre said this week. "A maximum price would not solve the fundamental problem, which is that there is too little gas in Europe."

But supporters of the measure argue the cap could be competitive and leave enough space for suppliers to still turn a profit, but without charging as much as they do now.

Gas prices are this week hovering around €200 per megawatt-hour – over six times the level registered a year ago.

As the most expensive fuel needed to meet all power demands, gas sets the final price of electricity. By introducing a price cap on gas imports, electricity bills would be artificially contained.

So if the gas cap is out, what is in the package?

In her State of the Union speech, Ursula von der Leyen announced that the EU's initial package of extraordinary measures to curb electricity prices will contain three elements:

  1. A plan to introduce mandatory power savings during peak hours;
  2. A cap on the excess revenues made by power plants that do not use gas to produce electricity, such as renewables, nuclear, hydropower and lignite;
  3. A solidarity mechanism to partially capture the surplus profits made by fossil fuel companies (oil, gas and coal) during the 2022 fiscal year.

In a rare move, the Commission assembled the three instruments in a single legislative text, which will be discussed and likely tweaked by energy ministers on 30 September before it enters into force.

Approving the package will simply require a qualified majority in the Council and completely bypass the European Parliament. The goal is to deliver instant relief for consumers and companies under financial stress.

All the measures will be time-limited and extraordinary.

Mandatory power savings

Savings has become the leitmotiv of the EU's response to the energy crisis. 

Cutting down on consumers' electricity use is an indispensable tool to address the huge imbalance between supply and demand that is sending prices soaring, EU officials argue.

On top of the gas reduction plan agreed in July, the Commission has now proposed a plan to reduce electricity consumption, which would encompass households, companies, factories and public buildings.

The EU-wide plan would introduce a mandatory target to cut demand by at least 5% during peak hours. In practice, this would affect between three to four hours per weekday, the Commission estimates.

Peak hours refer to the time of the day when demand intensifies and prices reach their highest levels, particularly due to the influence of gas-powered plants.

Countries will be allowed to identify their own peak hours, which usually take place between 7 am to 10 pm, and design their own measures to encourage the reduction.

In addition to this, a voluntary target would ask countries to slash overall electricity demand – combining both peak and off-peak hours – by at least 10% by the end of March.

The Commission believes record-high bills are already pushing consumers to cut down on their power use and the EU-plan would serve to reinforce the ongoing trend.

Redistribution of excess revenues

Under the current rules of marginal pricing, the final price of electricity is set by gas, the most expensive fuel. This means that power plants that do not use gas and have significantly lower production costs, such as wind farms, solar panels and nuclear reactors, are enjoying excess revenues.

"These companies are making revenues they never accounted for, they never even dreamt of," said von der Leyen during her speech on Wednesday.

The Commission envisions a uniform EU-wide cap that would seize some of these revenues and redirect them towards governments, who would then be obliged to transform the money into income support for vulnerable households or regulated tariffs.

The cap would be set at €180 per megawatt-hour and would apply directly to the electricity price created by the market. Anything that exceeds the cap would be funnelled into the state.

This means that if, on a given day, a non-gas plant is selling power at €250 per megawatt-hour, the government would be able to collect €70 per megawatt-hour in extra revenue.

Prices in the electricity market change every day so the gains are expected to vary. The days on which prices fall below the €180 per megawatt-hour, the cap would be rendered irrelevant.

According to the draft legislation, the cap would apply to wind, solar, geothermal, hydropower without reservoir, biomass fuel (excluding bio-methane), waste, nuclear, lignite and crude oil.

The Commission estimates the measure could bring about €117 billion in additional funds, but the calculation was done on an annual basis and the legislation would only run until March 2023. However, it could be extended by member states if they deem it necessary.

Countries that have already introduced similar measures, like France, Spain, Portugal and Greece, would be allowed to continue their schemes if they pursue the same objective as the inframarginal cap, EU officials said.

The tax that is not a tax

Brussels wants to raise more money by going after the surplus profits reaped by companies that extract and refine fossil fuels, including gas, oil and coal.

Under a so-called "solidarity mechanism," governments will be empowered to impose an additional tax of at least 33% on the profits made by these companies in the 2022 fiscal year – but only if the declared profits represent a 20% increase compared to the average profits obtained in the last three years.

This could result in up to €25 billion for governments. The cash would be turned into financial support for households and companies, incentives for power savings or investments in green technology.

Officials in Brussels insist the measure does not equate a windfall tax, even if its essence is strikingly similar and the surplus profits will be collected by tax authorities. 

"It is definitely not a tax," said a senior EU official. "We carefully checked the legal basis."

Taxation policy requires unanimity by member states. But, as the Commission combined the three instruments into one overarching legal text, the measure on fossil fuel companies could be approved by qualified majority – as long as its legality is not contested in court.

"Extraordinary times require extraordinary action," said the official, when pressed about the windfall tax comparison.