EU Squabbles Continue Over Energy Crisis

Battle lines are being drawn across the European Union as member states continue to disagree over the best way to handle high electricity and gas prices, with calls to mitigate future gas prices. Wholesale spot gas and electricity prices have dropped off from October highs but remain supported by cold weather and dwindling gas storage levels. Energy Commissioner Kadri Simson said at last week’s Energy Council meeting that she expects gas prices to remain high until spring 2022.

France and Spain lead the charge for extensive market changes. Both agree that natural gas setting the marginal price for electricity is unfair, as some countries rely on other fuels, such as nuclear and renewables, for a lot of electricity generated domestically. Joined by Greece, Italy and Romania, the countries have asked for a reworking of electricity market rules that would allow them to set wholesale prices that "reflect the costs of the generation mix" in individual member states rather than the last megawatt technology, which is typically natural gas.

The contingent of mostly southern European countries also wants measures to “to ensure a continuous and stable gas supply at affordable prices to consumers," as well as regulations to ensure "a high rate of utilization" of gas and LNG storage facilities. One of the initial proposals floated in an earlier council meeting in October is an EU-wide voluntary joint gas procurement platform held by “competitive auctions.” Longer term, they want Brussels to amend internal energy market rules, so they better support renewables over the coming decade as the bloc works toward reducing greenhouse gas emissions by 55% by 2030 versus 1990 levels.

These proposals are opposed by a group of nine countries — Germany, Austria, Denmark, Estonia, Finland, Ireland, Latvia, Luxembourg and the Netherlands — which want to stay the current course as the current pricing crisis was expected to be short-lived. They say short-term measures endorsed by the European Commission in October should constitute the first line of defence in the battle against high prices. “We agree with the European Commission that in the short term, the price hike can be best addressed through temporary and targeted national actions by member states, where appropriate, to protect vulnerable consumers and businesses,” the countries said.

The preliminary findings of a report from the Agency for the Cooperation of European Regulators (Acer) also supported existing EU market rules, expecting gas and electricity prices to be substantially lower from April. Acer found the move away from oil-indexed gas to be better value for money over the long term, even if spot prices have been more expensive in 2021. Over the last 10 years, gas hub pricing has saved member states some $70 billion over the last decade compared to the $30 billion lost this year. Simson said the report “points out risks that alternative pricing mechanisms could pose to cost-efficient decarbonization, cross-border exchanges and security of supply.”

Higher gas dependency and lower electricity interconnections increases an EU country’s exposure to higher electricity prices, the report showed. However, the inclusion of gas in Europe’s electricity mix has “yielded considerable economic and environmental benefits” allowing wholesale power prices to be at “competitive levels” for years and reducing carbon dioxide emissions. Gas demand patterns in power generation are also expected to change as more renewable capacity is operational, the reports showed. Baseload demand levels will drop but peaks could be higher and longer. Spot gas hub pricing remains a better option than fixed volume oil-indexation as demand and supply flexibility will be needed even more in the future.