European Commission comes to the Rescue

On Wednesday (September 14), in her State of the Union Address, President Ursula von der Leyen announced in a package of energy measures aimed at providing a response to the EU-wide energy crisis. The European Commission (EC) is focusing on consumers dealing with high energy bills, and firms participating in the wholesale energy markets.

No End in Sight

Gas and electricity prices have increased year-over-year, hitting all-time highs in 2022. It’s the EC’s view that the dual crisis of Russia’s invasion of Ukraine and subsequent weaponization of its energy sources has tightened supply to an almost breaking point. Add this to a rise in prices marked by inflation and extreme weather conditions across Europe this summer, and the increase on electricity generation has further reduced supply. With no political negotiation in sight for the foreseeable future, the EU requires a long-term strategy to wean itself off of Russian energy imports.

UK Hit the Hardest

The UK has received the worst of the energy supply problems in the EU. Before the UK decided on electricity caps, a typical household’s energy bill was projected to rise from its average of £1,971 to £3,549 per year over the course of the crisis. With government interference the average bill will be adjusted down to around £2,500 per year.

UK vs EU Household Electricity Prices

Reducing Demand

In the Commission’s State of the Union, they propose “exceptional electricity demand reduction measures”, to reduce the cost of electricity for consumers and redistribute the energy sector’s surplus revenues to customers.

They propose an obligation of European Union (EU) member states to reduce electricity demand by 10% until March 31, 2023. The EU expects a reduction of gas consumption by 1.2 bcm over the winter, as part of their climate commitments under the European Green Deal.

Revenue Caps & Sharing

The Commission also proposes to set a revenue cap at €180 EUR/MWh for “inframarginal” electricity producers. These are technologies with lower cost like ignite, nuclear and renewables which are generating significant revenues. They see this arrangement as enabling electricity producers to cover their costs without impairing investments; any revenues collected above the cap will used by member states to help consumers reduce their bills. The EC is also encouraging members to share part of the revenues with other member states with lower electricity generation.

Oil & Gas

They also call for a temporary contribution on excess profits on oil, gas, coal, and refineries, not covered by the inframarginal revenue cap. These profits would be collected by Member States on 2022 profits above the 20% increase on the average profits of the previous three years. The revenues would be redistributed to vulnerable household, companies, and energy-intensive industries.

According to Goldman Sachs gas prices in Europe should go down, as the EU has been putting forth the necessary effort to shore up their supplies. They expect European wholesale natural gas prices to fall from about €215 a MWh to below €100 a MWh by the end of Q1 next year, assuming normal winter weather conditions. This is significantly below the €213 previously predicted. The average gas price has noticeably increased from Q4 of last year.

UK vs EU Household Gas Prices

Commissioner for Energy Kadri Simson said:

“We are making an emergency intervention in the design of our power market today, capping revenues for lower cost electricity producers, and allowing exceptional measures on regulation of prices for businesses and households. This will enable Member States to raise and redirect revenues to those in need in this difficult time, without undermining the long-term functioning of the market.”

It’s the Russian view that there is no alternative to Russian gas for Europe. Oleg Aksyutin, Deputy Chief Executive Officer of Gazprom, told a conference this week that no significant additional supplies of LNG could be expected in the foreseeable future.
As a point of interest, lets take a quick look at a snapshot of what European nations are spending to bring relief to their citizenry:

UK 57 billion
Italy 52 billion
Germany 30 billion
Romania 10 billion
Finland 10 billion
Poland 10 billion
Greece 7 billion
Bulgaria 1 billion


We look at the EU measures in the same light as the Biden Administration’s Inflation Reduction Act, which should have been named the Inflation Relief Act. While it has the best intentions, it attacks the symptoms of inflation (and the energy crisis stemming from Russian/Ukraine war), it fails to address the root causes. Our current global inflationary issues have their source in long-term monetary decisions, augmented by the COVID-19 pandemic.

The EU has done a decent job of shoring up its resources in a short time and will get through this winter without significant energy rationing – 2023 to 2026 is the real challenge. When it comes to gas, observers should take into consideration that it is an obstacle for Russia to find new long-term customers (at a good price). 74 percent of Russia’s exports currently go to Europe- a significant amount that will decrease over time.

Russian Natural Gas Exports by Country

We’ll continue to monitor this situation as it develops.

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