Can the EU agree a plan to ease energy crisis?

Just days after Russia said it would not restart gas flows through a critical pipeline to Europe, the bloc’s energy ministers backed overarching plans for a price cap on all gas imports and a levy on power producers.

But, in an emergency meeting late last week, they struggled to agree on the details. They still have to decide whether to cap the price of all imported gas or just supplies from Russia and how to establish a mechanism to skim off the windfall profits of energy companies enjoying record high prices.

With European Commission president Ursula von der Leyen expected in her annual State of the Union address on Wednesday to focus on energy, bureaucrats are trying to find common ground between the 27 member states to prevent blackouts and financial pain for businesses and consumers this winter.

Fredrik Persson, president of industry body BusinessEurope, said “tackling skyrocketing energy prices and finding ways to mitigate them is an urgent matter of survival for both European industries and households”.

Why is the EU acting now?

The announcement by Moscow on Monday that gas supplies would not be restored through the Nordstream 1 pipeline until sanctions imposed after its invasion of Ukraine were lifted has raised fears of a total cut-off of Russian gas.

Last year, the EU imported about 155bn cubic metres of Russian pipeline gas, about 40 per cent of its total supply. That has now dropped to 9 per cent, with reduced flows still reaching Europe through Turkey and Ukraine. The squeeze on supply has helped push prices up to about 10 times their average over the past decade.

EU gas storage levels have reached 83 per cent of their total capacity, well ahead of an 80 per cent target set for the end of October, raising hopes there will be sufficient supplies this winter.

But there is still pressure on politicians to find solutions to the crisis. Many businesses in energy intensive sectors such as fertiliser production and steel have already closed or reduced output, while households are having to cut back on basics such as food to afford energy bills.

What has been proposed?

The commission put forward proposals on Wednesday that included suggestions to skim off the profits of energy companies and recycle the proceeds to households and businesses, an easing of state aid rules to bail out companies hit by high energy bills, a mandatory cut to peak electricity demand and, more tentatively, a cap on the price of gas, including from Russia.

At Friday’s meeting, according to the Czechs, who hold the European Council’s rotating presidency until January, ministers agreed that Brussels should focus on four areas: reductions in peak electricity demand; windfall levies on non-gas power production; a broader gas price cap; and provision of liquidity to power producers facing increasingly high collateral demands.

Several EU capitals also called for a break in the link between gas and electricity prices. Others want to temporarily cut the cost of carbon levies that companies pay in recompense for their emissions.

How would the price caps and windfall levy work?

This is where agreement over what should be done breaks down. On gas price caps, countries including Italy, Austria and Greece are opposed to a cap only on Russian imports as they fear that Moscow would cut off the remaining supplies.

Broader consensus was found for a cap on a wider proportion of imports but whether such a cap would only be applied to pipeline gas or to all imports including liquefied natural gas was not agreed.

Denmark and the Netherlands are among the countries that are not keen on an overall cap as they fear that cutting prices would only serve to increase consumption.

“All these broad caps have the disadvantage that you disincentivise [securing] supplies from other countries,” said Hans Vijlbrief, the Dutch minister for extractive industries.

A windfall levy on the profits of non-gas power producers could be structured either as a revenue clawback or as more dynamic price limits that kick in when prices reach certain thresholds.

There is also debate over whether thresholds should be specific for each source of power generation such as coal, nuclear, wind and solar or uniformly applied, in which case more expensive fuels such as coal would be affected more.

Will the plan help consumers?

Analysts at data group Argus Insight said that while the EU’s desire to protect households from poverty was “laudable”, the “unprecedented pace of policy generation has resulted in a number of proposals that would not achieve this aim”.

Measures such as capping the price of all imported gas, for example, could prompt producers such as Algeria and Norway to cut supplies, although Norway has said it is open to the idea. That, in turn, could cause a further increase in prices, the Argus analysts argued.

But Henning Gloystein, director of energy and climate at Eurasia Group, said the combination of price caps, windfall levies and demand reduction “should actually go quite far in preventing energy costs from spiralling further”.

Riina Sikkut, Estonia’s minister of economic affairs and infrastructure, said a mandatory cut to electricity demand “offers huge potential to bring down prices but more important than compulsory saving targets is shifting consumption from peak hours to off-peak hours.”