Jump to content

What to cap? Emergency Interventions in the European Electricity and Gas Market

EPICO KlimaInnovation suggests Emergency Interventions in the European Electricity and Gas Market.

Brussels, 27 September 2022: Today, EPICO KlimaInnovation published a policy report on proposed emergency measures on the energy market design, “What to cap? Emergency Interventions in the European Electricity and Gas Market”. The publication also marks the kick off of EPICO’s presence in Brussels, and its expansion of focus to EU energy and climate policy.

Following the Russian aggression and invasion of Ukraine, the EU’s energy market suffers dire consequences of raising gas and electricity prices. As a way of addressing this, the European Commission put forward a series of suggested measures to keep energy prices for consumers in check.

Ahead of the Council of the European Union’s Ministerial meeting on 30 September, EPICO KlimaInnovation provides an in-depth analysis and policy proposals laying out a number of recommendations designed with the specific aim of limiting any negative consequences for households and companies, hence by decreasing the costs of energy bills, without overhauling the existing market design.

  • Regarding electricity market interventions, EPICO KlimaInnovation suggests a carefully calibrated uniform revenue cap on inframarginal pricing, such as a phase-out mechanism, efficient dispatch across markets, inclusion of financial trades, and how to avoid distortions at the border.
  • Conscious of the fact that demand reduction is the most important measure when facing a supply shock and high energy crisis costs, we suggest that instruments should focus more on the hours in which gas-fueled power plants are running to target them more specifically towards gas savings.

None of the measures proposed by the Commission and member states targeting the electricity market solve the problem of record-high gas prices. This remains a pressing issue, since funds from both a revenue cap on inframarginal generators and a foreseen 'solidarity contribution' from companies in the gas, coal and refinery sectors will likely not be enough support.

  • Regarding an unavoidable gas market intervention, we explore a price limit for the EU’s domestic gas wholesale market in form of a limit for the TSOs imbalance price. Gas producers therefore would have to reduce the price at which they offer new contracts to levels at, or below, the price limit, in order to continue to profit from sales in the EU gas market. Such a measure would provide clarity about price developments in case of supply interruptions, and thus can largely reduce risk premia on forward prices.
  • With regard to LNG imports, the Council should consider combining an EU scale price limit with a premium system, or a contract for difference, in order to continue maintaining sufficient volumes of LNG shipments to the EU as a back-up measure.
  • The reduction of the wholesale price level will reduce price-based incentives for gas savings. Therefore, a price limit needs to be combined with a binding EU agreement on gas saving targets. This would provide the basis for national governments to implement programs and measures to reliably achieve gas savings.

The most efficient way that the European Union can tackle this crisis is by adopting a strong, uniform, and coordinated temporary emergency response, that allows renewable energy producers to continue to partly benefit from the energy market, hence increasing investment in the sector, while protecting the pockets of families and companies across Europe. It is now in the hands of national governments to decide: is this crisis a catalyst for a coordinated and coherent energy policy across member states, or an example of EU capitals' inability to take joint action?”, Dr. Bernd Weber, Founder and CEO EPICO KlimaInnovation.

Press contact:
Nassos Anastasilakis
Mail: nassos.anastasilakis@epico.org

Download Policy Report