international analysis and commentary

Assessing EU measures against the energy price increase

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The recent turbulences in energy markets have emerged with several factors contributing to increased prices. These include a higher energy demand driven by the post-COVID-19 economic recovery, more extreme weather conditions and supply-related issues, which have worsened due to the Russian invasion of Ukraine. However, as early as in the last months of 2021, the European Commission outlined several actions that member states could implement to face the exceptional rise in global energy prices.

 

For example, in October 2021 the Commission published a toolbox of measures aimed to address the price increase while enhancing energy systems’ resilience against future turmoil. The suggested interventions are divided into short-term and medium-term measures. In the former, the goal is to protect consumers and businesses. Immediate actions include supporting vulnerable households with emergency income aid and tax reductions, temporarily deferring bill payments, providing financial support to companies and using security measures to avoid disconnections from the grid.

While these could be considered temporary measures, other medium-term actions are needed to make energy systems less affected by future volatility. On this point, last October the EU reaffirmed the role of the energy transition as the best insurance against price shocks as it could also provide more independence from third countries. The medium-term measures indicated by the Commission cover an acceleration in investments in renewables and energy efficiency, along with the development of flexibility solutions such as batteries and hydrogen, a possible revision of the electricity market design and an assessment of the potential voluntary joint procurement of gas by member states.

 

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Following the beginning of the war in Ukraine and the further surge in energy prices, in March the Commission published a Communication on “Security of supply and affordable energy prices: Options for immediate measures and preparing for next winter.” In this case, the Commission suggests some short-term measures together with more structural actions targeting 2023 and beyond. The short-term options are grouped into two main categories: solutions providing financial compensations and changes in regulatory framework. In the first group there is a further distinction between retail and wholesale markets, where the first category includes income support, a temporary state aid framework and reduced taxation. The second one lists a cap on the fuel prices for fossil generators and a cap on electricity prices as potential measures against the price increase. A common solution to retail and wholesale markets is represented by the aggregation/single buyer model, with an entity buying electricity at favorable terms for consumers, while the regulatory option regards setting a fixed price for certain baseload generators.

However, some of the drawbacks of these solutions include the implied fiscal cost, competition and market distortion, with a higher level of complexity and impact on investments already implemented. In the medium term, the solutions proposed by the Commission to ensure gas supply at a reasonable cost are to set price limits for trading gas in the EU and to create a task force for purchasing gas at the EU level, in a similar way to what has been done for the COVID-19 vaccine supply. Other structural measures envisage the realization of interconnections to integrate the energy markets, favoring renewable power plant installation, implementing energy efficiency measures and the diversification of energy supply.

The decision of EU leaders to end the dependency on Russian energy imports has been translated in the REPowerEU plan published on May 18th. Up to 2027, €210 billion of additional investments are needed to achieve independence from Russian energy imports, but it will be repaid by the almost €100 billion per year in savings, mostly related to gas imports. The short-term measures included in the plan consider the common purchases of gas, liquified natural gas (LNG) and hydrogen through an EU Energy Platform, the creation of new energy partnerships with reliable suppliers, the rapid implementation of solar and wind projects, and the increase of production of biomethane.

In addition, recommendations for energy savings will be provided to citizens and businesses, and the gas storage will be filled to 80% of capacity by November 1, 2022, to ensure an adequate supply in the winter. The other actions to be completed before 2027 envisage faster permits for renewables, which shall increase from the previous 40% to 45% in 2030 EU energy mix, while energy saving targets are raised from 9% to 13%. Investments are needed for more integrated and efficient gas and electricity networks, along with a modern regulatory framework for hydrogen which will enable the installation of 17.5 GW of electrolyzers by 2025 to produce 10 Mt of green hydrogen. In this context, the REPowerEU plan highlights the importance of critical raw materials for the energy transition to avoid transferring the energy dependence problem on to the supply chain. For this reason, a specific EU proposal will be prepared to ensure industry access to those materials.

The decarbonization process, in addition to the volatility in energy prices, requires a careful assessment of electricity market design and its evolution for the coming years. For this reason, in May the Commission published a Communication on a possible course of action for the electricity market. Stakeholders involved in the discussion supported the EU indications provided in the abovementioned October toolbox, while pointing out that some short-term measures – which intervene in the wholesale market functioning and into price formation – could lead to significant distortions.

 

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The Communication also mentions the recent ACER[1] report “Final Assessment of the EU Wholesale Electricity Market Design,” which indicates some options to improve the current market design with the goal of making it ready for the energy transition. According to ACER, competitive long-term markets with increasing liquidity and product offerings are needed, as are support schemes for renewables and other flexible resources (such as demand response and storage). Furthermore, an improved coordination for investments – especially for cross-border projects – would facilitate the achievement of EU objectives.

The EU Commissioner for Energy Kadri Simson

 

It is also necessary to understand how the measures suggested by the EU have been translated into tangible actions by the member states. According to the Bruegel think tank, the most implemented measure across Europe has been economic support to the most vulnerable groups with almost 90% of the member states adopting this initiative. The second most approved action has been a reduced energy tax implemented by 70% of the EU countries, while a windfall profits tax has been established in only six countries, including Italy. With regard to regulation, member tates preferred to address retail price rather than wholesale price mechanisms.

Specifically, in Italy the first measures approved by the government date back to September 2021 and consider, for the gas market, the reduction of general charges and the application of 5% reduced VAT to residential and industrial uses. For the electricity market, general system charges have been eliminated for residential and small commercial and industrial sites (up to 16.5 kW); beginning in 2022, this measure was extended to larger customers. For 2022, the government also decided to increase the discount given on bills for people with financial hardship or with severe medical conditions. Other measures include tax credit for energy intensive companies, a windfall profit tax, the reduction of gasoline prices by 30 c€/liter, and other more structural actions to accelerate the installation of renewable power plants and regasification units.

While significant efforts have been made to address the current situation and alleviate the weight of soaring energy prices, the real and effective solutions must be built now with a longer-term perspective. Only in this way, with the support of a decarbonization process that will make us more energy independent, will we realize a solid and resilient energy system less affected by external vulnerabilities and that targets the climate neutrality goal for 2050.

 

 


[1] The EU Agency for the Cooperation of Energy Regulators

 

 


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