Brussels mulls price cap on renewables and nuclear power to cushion electricity bills

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By Jorge Liboreiro  & Efi Koutsokosta
The EU Commission's draft document suggests a price cap for non-gas electricity producers, like wind and solar farms.
The EU Commission's draft document suggests a price cap for non-gas electricity producers, like wind and solar farms.   -   Copyright  Michael Sohn/Copyright 2021 The Associated Press. All rights reserved

The European Union could set a maximum price on the electricity generated by non-gas producers, namely renewables and nuclear, with the aim to raise extra revenue for households under financial stress, according to draft plans circulated by the European Commission.

The measure should be accompanied by an EU-wide plan to cut down electricity demand, similar to the 15% gas reduction plan agreed before the summer break.

The ideas, contained in a leaked non-paper seen by Reuters and other media outlets, do not constitute an official policy announcement and are set to be discussed by EU energy ministers when they gather next Friday for an emergency meeting.

The Commission believes the three-pronged approach – savings, price cap and consumer support – could be rapidly implemented to offer instant relief across the economy, although it is unclear how much.

"[The measures] will not bring energy prices back to pre-crisis levels or remove the significant effects of the crisis on both inflation and the European economy as a whole," says the document.

It also rules out the introduction of more radical proposals, including a full suspension of the wholesale market and regulated retail prices.

The paper is a "preliminary assessment" and has not been validated by the executive's legal services.

The leak comes just days after European Commission President Ursula von der Leyen pitched an "emergency intervention" and a "structural reform" in the electricity market to tame the spiralling prices besetting households and companies alike.

Von der Leyen also endorsed a price cap on Russian pipeline gas flowing to Europe, but this was not featured in the draft paper as a possible solution.

"We see that the electricity market is no longer operating because it is being severely disrupted by Putin’s manipulation. And that is why we need to go a step further," she said on Friday.

"Putin prefers to burn off gas than to contractually supply it to Europe or other regions. So save energy wisely, especially at peak times, so that we don’t need gas."

The Commission chief is scheduled to deliver her annual State of the Union address on 14 September, when she is expected to unveil further details on solutions to tackle the worsening energy crisis.

Marginal pricing under scrutiny

Today's liberalised electricity market is based on a model of marginal pricing.

Under this system, all electricity producers – from wind and solar to fossil fuels – bid into the market and offer power according to their production costs. The bidding starts from the cheapest sources – the renewables – and finishes with the most expensive ones – in this case, gas.

Since most EU countries still rely on gas to meet all their power demands, the final price of electricity is often set by gas, even if clean, cheaper sources also contribute to the total mix.

The system was initially praised for boosting transparency and promoting the switch to green energy, but Russia's invasion of Ukraine has created unprecedented instability.

The continued supply manipulation by Gazprom, Russia's state-controlled energy giant, has put investors on edge, leading to rampant speculation and record-breaking prices.

Scorching summer temperatures, persisting drought and a shortfall in nuclear production have only augmented the role gas plays to keep the lights on across the EU.

Euronews.
Marginal pricing means the final market price is set by the most expensive fuel needed to meet all energy demands.Euronews.

"We need a new market model for electricity that really functions and brings us back into balance," von der Leyen said.

The document drafted by her executive rejects drastic ideas, such as a far-reaching cap on all electricity, subsidies for carbon emissions permits or an outright suspension of the wholesale market.

Instead, it suggests a more targeted cap for non-gas producers – wind, solar, nuclear, certain types of hydropower, as well as lignite – who have seen a surge in profits under the marginal pricing model.

The difference between the final electricity price and the agreed-upon cap would yield extra revenues for governments, who would then be obliged to redirect these funds towards consumers in need, and possibly small- and medium-sized companies.

The Commission recommends countries turn the funds into direct income support, rather than into regulated retail tariffs for selected consumers, which risk distorting the free market.

This novel price cap would not be compatible with the windfall taxes on energy firms that countries like Spain and Italy have introduced in recent months, the leaked document warns, because these exceptional measures are broader in scope.

The executive also dismisses the possibility of applying the Iberian model – a subsidised cap on gas prices – to the entire EU market, fearing it would encourage a higher consumption of gas and make countries more vulnerable to Russia's supply manipulation.

Most experts insist that marginal pricing continues to be the best market model in normal times and any intervention should be precise and time-limited. Energy savings, they say, remain the best tool for the EU to make it safely through the winter season.

"There is a limit to what a reform of the market design or emergency interventions can do to limit the price. We should not think this kind of intervention will magically solve Europe's energy problem. It will not. We are in a very tight market," Simone Tagliapietra, senior fellow at the Bruegel think-tank, told Euronews.

"In my view, the main solution will inevitably have to do with energy demand reduction, both on gas and electricity."