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EU approves mandatory energy savings and cap on company revenues

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By Jorge Liboreiro  & Alice Tidey
EU energy ministers are set to discuss a proposal that includes three emergency measures to curb prices.
EU energy ministers are set to discuss a proposal that includes three emergency measures to curb prices.   -   Copyright  Virginia Mayo/Copyright 2022 The Associated Press. All rights reserved   -  

EU energy ministers approved on Friday a first package of emergency measures in an effort to curb soaring electricity bills and coordinate member states' responses to the energy crisis.

The package, negotiated in less than a month, includes mandatory power savings, a cap on excess market revenues and a levy to capture surplus corporate profits.

An EU-wide price cap on gas imports remains, for the time being, under study.

"Today the EU managed to deliver," said Jozef Síkela, the Czech Republic's minister for industry and trade. The country holds the EU Council's rotating presidency and is tasked with moderating internal talks.

"We completed another part of the puzzle but definitely not the last one," Síkela added. "This is an immediate patch."

The agreement comes as inflation in the eurozone hit double digits – 10% – for the first time in the history of the single currency, primarily driven by skyrocketing energy bills.

The EU intends to both reduce electricity consumption during peak hours to rebalance the supply-demand mismatch and seize part of the revenues that power plants and fossil fuel companies have made due to high prices.

After a short discussion on Friday morning, ministers reached a deal and kept the core substance of the package intact, with amendments focused on flexibility and practical implementation.

The three measures are all time-limited and cover:

  1. An EU-wide plan to introduce power savings: a mandatory 5% target during peak hours, when gas plays a bigger role in price-setting, and a voluntary 10% reduction in overall electricity demand.
  2. A cap on the excess revenues made by power plants that do not use gas to produce electricity, such as solar, wind, nuclear, hydropower and lignite. The cap will be uniform and set at €180 per megawatt-hour. All revenues that exceed the barrier will be collected by governments.
  3. A solidarity mechanism to partially capture the surplus profits made by fossil fuel companies (crude oil, gas, coal and refinery). Authorities will be able to impose a 33% levy on the profits made by these companies in the 2022 fiscal year – but only if the profits represent a 20% increase compared to the average since 2018.

The extra funds obtained through the second and third instruments will be re-directed to households and companies under financial stress in the form of subsidies, reduced tariffs or income support.

Countries that have already established similar solutions at the national level will be allowed to continue their schemes if they pursue the same goals as the EU's package.

While the package represents a decisive step forward in the EU's reaction to the energy crisis, there is broad consensus that further action is needed before the winter season arrives.

"We need to continue our work," Síkela said. "We're in an energy war with Russia."

His French counterpart, Agnès Pannier-Runacher, echoed the call. "Let me be very clear: we will have to go much faster, much further and make other proposals," she told reporters on Friday morning.

European Union, 2022.
EU Commissioner Kadri Simson and Czech Minister Jozef Síkela celebrated the outcome of Friday's energy meeting.European Union, 2022.

What about a divisive price cap on gas imports?

At the end of Friday's meeting, all eyes were on an initiative to impose a price cap on all gas imports entering the EU, regardless of geographical origin, and all gas transactions taking place in the single market.

The unprecedented measure has gained traction across the bloc and was this week endorsed by a group of 15 member states, including France, Italy, Spain and Belgium.

As the most expensive fuel to meet all power demands, gas sets the final price of electricity, even where cheaper and greener sources contribute to the total mix.

By capping gas prices, electricity bills will be artificially contained, the signatories believe.

So what happened with the gas cap?

For now, the idea continues to be studied by the Commission's services, which worry the cap would scare suppliers away, endanger the EU's security of supply and incentivise gas consumption at a time when savings have become crucial.

"We had a frank discussion," said Kadri Simson, European Commissioner for energy. "While views differ across member states, there's also common ground. We agreed the market is not working normally and an intervention is necessary."

Simson said the cap suggested in the joint letter was "radical" and required a series of preconditions, such as an "unambiguous" mandate to reinforce the EU's gas reduction plan beyond the existing 15% target.

As a safer alternative, the Commissioner offered a targeted price cap on gas exclusively used for electricity generation, together with a separate benchmark for the trade of liquefied natural gas (LNG). Details on both proposals remain scarce and will be developed in the coming weeks.

"These are far-reaching measures that intervene substantially in the functioning of the European gas market," Simson said. "We are not proposing this lightly."

Although Síkela, as representative of the EU Council's presidency, did not voice his country's position on the increasingly heated debate, he said there were "serious concerns" among member states about the Commission's lack of action regarding the gas cap.

In the morning, Teresa Ribera, Spain's minister for the ecological transition, was more explicit.

"We’re disappointed with the Commission’s non-proposal," she said. "The Commission is aware this is a sensitive topic and has not managed to find the space in which all countries can respond positively."

But not everybody is keen on capping gas prices. Austria, Hungary, the Netherlands, Denmark and, crucially, Germany are among those opposing the move, fearing a total disruption of supplies.

"Putting a fixed price cap on gas can only be applied if you say what happens if not enough gas comes to Europe. Because that's my counter-question," said German Vice-Chancellor Robert Habeck at the end of the ministerial meeting.

"And the only answer I always hear is that the [gas] shortage will then be shared across Europe. But I don't think that's politically sustainable. That would bring Europe to its limits, probably to its end."

In a document published on the eve of the meeting, the Commission explained that a cap on all gas imports and transactions would upend market forces and require the creation of a "new entity" to ensure a fair and uninterrupted distribution of supplies among the 27 member states.

"Deciding on gas flows administratively is without precedent in Europe and there is currently nobody at EU level (...) which has this experience and technical capability to undertake this task," the document reads.

Simone Tagliapietra, a senior fellow at the Bruegel think tank, was equally sceptical, arguing the broad cap would bump into the "complexities" of the gas market and leave Europe "worse off."

"Today's measures represent a good compromise solution to maintain price signals for demand reduction while unlocking resources that countries can use to lower energy bills of families and businesses," Tagliapietra told Euronews.

"But it is not sufficient to fix all problems we have of course. We really have no silver bullet here. We need a mix of solutions to get out of the woods."

This article has been updated to include new reactions and developments.