Recipes for taming unbearable energy prices: what can work and who will pay for it

Although the prices of electricity, which reached crazy numbers on the European stock exchanges in the past few days, have partially fallen, the entire market is off the chain and prices are extremely volatile. The European Union therefore urgently needs to calm the situation and come up with a systemic solution. A large number of European countries have already taken some measures to reduce energy prices. Several solutions are offered, but they all have their pitfalls, be it in how effective they are or in who pays for them in the end. The proposal of the European Commission and the words of its head about the fact that it is time to set a ceiling for Russian gas prices were also waving in the atmosphere.

The price of electricity with delivery for the next year was traded on the Prague Stock Exchange on Friday for around 520 euros per MWh. At the end of August, this value reached an astronomical 1,000 euros per MWh. The price of electricity on the European exchanges began to fall sharply after the President of the European Commission, Ursula von der Leyen, promised that Brussels would come up with the necessary market reform very quickly.

The possibility of introducing maximum prices for Russian gas will be discussed in a week by the energy ministers of the EU countries, whose extraordinary meeting was called by the Czech Presidency of the Council of the EU.

On Thursday, however, a proposal from the European Commission appeared, which supports the capping of electricity prices in all EU countries, but in a different form than expected. In it, the Commission talks about setting a maximum price for electricity from cheaper sources, not from the most expensive gas sources, which influence the final price. The price of electricity is determined by the operating costs of the last, so-called closing power plant necessary to balance the given demand. In Central Europe, the final sources are mainly black coal and gas power plants. The price of electricity therefore reacts strongly to the development of the prices of coal, gas and emission allowances.

However, the Commission is proposing a price cap for nuclear, lignite and renewable generation, arguing that they have lower production costs than gas, which is linked to the fact that they are also now making the highest profits. According to the commission, these should be taken from manufacturers and distributed as subsidies to vulnerable households and companies.

On Friday, von der Leyn said that “it’s time to cap the price of gas from Russian gas pipelines to Europe.” The price of gas for the European market for delivery in October was around 213 euros (5,215 CZK) per MWh on Friday after noon in the virtual trading hub of the Title Transfer Facility (TTF) in the Netherlands. A year ago it was about 29 euros and two years ago it was about 15 euros per MWh. Former Russian President Dmitry Medvedev responded to her words by announcing that Moscow would stop supplying gas to the Union in that case.

Unlike the Czech Republic, other states did not wait for a pan-European solution, and went, for example, by way of compensation, regulation or capping. Below we present some of the measures.

The Spanish model or the Iberian exception

It is this path that the Czech government likes the most. Spain and Portugal negotiated an exemption with the EC in June and started applying it from mid-July. The measure leads to a ceiling on the price of gas used in the production of electricity at 40 euros (about 980 CZK) per MWh. After six months, the price ceiling will start to rise by five euros per MWh per month up to 70 euros per MWh.

Comparison of average spot prices in Germany and Spain including compensation costs.

Comparison of average spot prices in Germany and Spain including compensation costs. Photo: CEZ

Any difference between the ceiling and the actual price on the market is compensated by the state, and the measure should amount to about 8.4 billion euros. However, the government wants to cover them up thanks to a special surcharge that all customers, including households, have to pay on their energy bills and is governed by the amount of consumption. The Spanish government wants to officially present its system to ministers next Friday and propose that other countries adopt it.

French model

The French government has ordered the majority-controlled EdF group, which operates nuclear power plants, to sell almost a third of its production to competing traders each year at a price of around 40 euros per MWh. These traders are then obliged to deliver this energy to protected customers such as households, hospitals and other elements of critical infrastructure. This is the so-called local ARENH scheme. However, the difference between the regulated energy price and the market spot price is very significant and amounts to hundreds of euros per MWh. The government therefore faces lawsuits from minority shareholders for a cut in profits. He wants to solve this by nationalizing EdF and buying out the remaining stake, with the shareholders receiving a high premium over the market value.

This is therefore the principle of a state energy trader, which in the case of the Czech Republic would buy part of CEZ’s production at a regulated price. At the same time, the Czech government has been talking about the establishment of a state trader since the spring. She is also talking about the nationalization of the rest of ČEZ, where she has a share of less than 70 percent. The government would thus have to proceed similarly to the French, but the purchase of shares would put a heavy burden on the state budget, which of course would also be paid by taxpayers as a result.

Capping final prices

The state would guarantee that domestic consumers, which may include households, but also institutions such as hospitals or schools and certain industries, will have a determined maximum electricity price. Energy suppliers would then receive compensation for the difference in costs. However, the state would obtain this money either through higher taxes, or it would have to find it in the budget and therefore cut other expenses. It is therefore a relatively expensive measure.

The so-called cost-saving tariff intended by the Czech government, which is supposed to cost a total of 66 billion, has a partially similar effect. This is intended to partially reduce the electricity, gas and heat bills for all households across the board. However, according to the information so far, this aid will probably not be very effective and this year households will only receive aid in the order of a few thousand.

Abolition or reform of the system of emission allowances

Emission allowances, the EU’s tool to burden coal and gas power plants, among others, have risen to a previously unimaginable almost 100 euros per ton of CO2 emitted. The reason is, firstly, that part of the allowances were previously withdrawn from the market on purpose, and above all, that they are facing speculation on their growth. Given that “dirty” coal-fired power plants have returned to play in most countries due to the energy crisis, allowances have now lost their meaning as a tool to motivate the transition away from fossil fuels.

By canceling emission allowances, electricity would partially become cheaper immediately, but at the same time, it would be a price drop rather only in percentage units. In addition, the head of the EC recently said that she does not support the abolition, so it is very unlikely that this solution will happen.

Withdrawal from the energy exchange

For the Czechia, the energy exchange in Leipzig, Germany, and the Prague PXE exchange are important. ČEZ and other producers are not obliged to trade here and therefore only sell part of their production here. We also buy gas on the stock exchange, which we do not take from producers through direct bilateral agreements. This is probably the biggest pitfall of a potential exit from trading on the stock exchange. As a large producer of electricity, we have enough and are self-sufficient, but for gas we are dependent on buying it on the stock exchange.

However, the entire energy stock exchange trading is now marked by the huge increase in advances for stock exchange guarantees that stock exchange participants have to make, so-called margin calls. Margining works as a settlement of the trade contract at the current price, so it is a certain protection of buyers. In the event of bankruptcy of the supplier, the exchange or the counterparty takes over the obligation and buys electricity from the market with the deposited money. However, the demand for margining in full arose at a time when electricity prices were changing by dozens of euros per MWh per year. Now we are at completely different values.

The state will lend ČEZ up to three billion euros (more than 74 billion crowns) precisely because of the repayment of stock exchange guarantees. Pavel Tykač and Daniel Křetínský’s companies are also interested in the state loan.

The article is in Czech

Tags: #Recipes taming #unbearable energy prices work pay

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