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EU Plans to Intervene in Energy Market as Winter Crisis Looms

·6 min read

(Bloomberg) -- The European Union is preparing to step into its energy market, intervening in the short term to dampen soaring power costs as the continent braces for the economic hit of energy shortages this winter.

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The bloc wants to limit prices in the short-term and then in the longer term sever the link between gas and electricity costs, according to Commission President Ursula von der Leyen. While she didn’t give details, the direction of travel underscores the sense of panic in European capitals.

“We will have to develop an instrument, that will happen in the next days and weeks, which ensures that the gas price will no longer dominate the electricity price,” she said Monday evening during an appearance in Berlin with Germany Economy Minister Robert Habeck.

The unprecedented spike in power prices, which have soared almost 10-fold in the past year, has fueled inflation and dramatically increased the economic burden on businesses and households recovering from the pandemic. Politicians are now contemplating the prospect of Moscow turning off the gas and forcing European industry to shut down, as a way of weakening the continent’s support for Ukraine.

European policy makers are stepping up the pace as they prepare for winter. They’re already racing to fill up gas storage and those efforts are starting to bear fruit. Gas reserves in the EU were 79.4% full as of Aug. 27, approaching already the target of 80% by Nov. 1.

Read: Europe Nears Gas Storage Target Early Despite Russian Supply Cut

Von der Leyen didn’t set out details, but more and more member states are calling for a price cap. The Czech Republic, which holds the rotating presidency of the EU, will convene an extraordinary meeting of energy ministers on Sept. 9.

EU diplomats said the commission could offer a detailed plan as soon as this week.

“As Europe finds itself amid extraordinary circumstances, extraordinary interventions do make sense,” said Simone Tagliapietra, a senior fellow at the Bruegel think tank. “However, a number of trade-offs exist, and the key challenge for European policymakers will be to avoid throwing the baby out with the bathwater.”

A draft internal EU document seen by Bloomberg News earlier this year showed the commission considered an option of capping gas prices to avoid “unbearably high” costs if Russia significantly limits or cuts off the flow. Introducing a maximum regulated price in an emergency would be limited to its duration and the market price should be used as long as possible.

One possibility would be to cap the price on European gas exchanges, but the document showed such a mechanism could be in general be introduced in different ways at various levels of the gas value chain.

Volatile Markets

With Russia squeezing gas deliveries and power-plant outages further sapping supply, pressure is growing on EU leaders to act quickly or risk social unrest and political upheaval.

“Skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design,” von der Leyen said earlier Monday at the Bled Strategic Summit in Slovenia. “It was developed under completely different circumstances and completely different purposes,” she added.

In the short term, Habeck suggested considering a short-term tax on excessive profits by energy companies as part of the transition. “The companies would still earn this money, but then it would be taken from them and be used to preserve the social cohesion and also to finance any aid for the companies, as long as we have developed and implemented the new market design,” he said.

European natural gas prices on Monday plunged the most since March after Germany said its gas stores are filling up faster than planned. Benchmark Dutch front-month futures fell as much as 21%, partly reversing last week’s jump of almost 40%.

The price spikes and shortfall in Russian deliveries are also putting unprecedented pressure on some power companies. German utility Uniper SE has requested an additional 4 billion euros ($4 billion) from Germany’s state-owned lender KfW after fully using its existing 9 billion-euro credit line, it said on Monday. That additional funding is about double its current market value.

The European Energy Exchange AG also said that traders need more government support to guarantee their buying and selling, particularly given the unusually volatile markets. Electricity prices for next year surged above 1,000 euros per megawatt-hour earlier on Monday, before plunging more than 20% on EEX, Europe’s biggest marketplace for power contracts.

Seeking Consensus

On the EU front, Czech Prime Minister Petr Fiala is seeking backing for his price-cap plan and discussed it with German Chancellor Olaf Scholz at bilateral talks in Prague on Monday.

Scholz told reporters at a joint news conference that he was grateful for the Czech proposal for a price cap and expressed confidence that the EU would reach an agreement quickly.

“We will look very carefully at what instruments we have that we can use to bring down electricity prices,” Scholz said. “It’s not something that can happen at random, it has to work in a technical sense, but obviously what is being set now as the market price is not a real reflection of supply and demand.”

The Czech presidency will seek to broker a solution before the Sept. 9 meeting of energy ministers in Brussels, Fiala said.

“In general, I can perhaps say that, for example, decoupling electricity prices from the cost of gas is one of the paths we can consider,” he told reporters.

Czech officials are proposing to cap prices of natural gas used for power generation, Industry and Trade Minister Jozef Sikela said earlier Monday.

“We may open the question of emission allowances, as some other member states have done in past, that also present a major part of the total price,” Sikela said.

“We may open the question of the overall market regulation, total decoupling of the prices,” he added, while cautioning that the bloc cannot meddle too much with the market or fuel speculation.

EU member states have already earmarked about 280 billion euros ($279 billion) in measures such as tax cuts and subsidies to ease the pain of surging energy prices for businesses and consumers, but the aid risks being dwarfed by the scale of the crisis.

Governments have also started to limit energy use, banning outside lighting for buildings in Germany and lowering indoor heating temperatures, to meet the EU voluntary target of cutting gas demand by 15%.

Belgian Prime Minister Alexander De Croo said Monday that it’s time for the EU to act.

“I really think that we should intervene because that cost of uncertainty is really becoming impossible,” De Croo said at an energy conference in Stavanger, Norway.

(Updates with new von der Leyen, Habeck quotes starting in the third paragraph)

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