BRUSSELS: The European Union (EU) is considering measures from carbon market changes to cutting energy taxes to curb prices boosted by the Middle East conflict, as concerns mount over their economic impact and increasing risks to supplies.
European Commission president Ursula von der Leyen outlined on Monday options to lower power costs in a letter to the heads of government before their gathering tomorrow.
Her blueprint came after energy ministers representing the bloc’s 27 member states discussed prices as a precursor to the leaders summit.
At stake is both the future of the European transition to a clean economy and a push to boost the competitiveness of the region’s heavy industry, which has blamed high energy costs for its weakening position against rivals from the United States and China.
EU governments are also concerned about the impact of the Iran war on inflation and a backlash from voters if the crisis hits heating and transport bills.
“The most urgent matter, from both a competitiveness and an independence perspective is energy, in particular oil and gas,” von der Leyen wrote in the letter.
“At present, the physical security of supply of the European Union is assured. But the increase of fossil fuel prices is already weighing on our economy.”
The EU should address four components that determine electricity prices, she said.
Those are the costs of power itself, grid charges, taxes and levies and carbon costs.
To decouple industrial power prices from more volatile wholesale markets, the commission will promote the use of power purchase agreements and contracts for difference for all low-carbon generation capacities, according to the letter.
The commission also highlighted the existing possibility for member states to offer electricity price relief to energy-intensive industries and use state aid to compensate for up to 80% of indirect carbon costs.
Another tool that von der Leyen flagged is subsidising or capping gas-fired generation prices to limit the effect of rising prices of the fossil fuel on power costs.
“The big thing here is whether or not we go together and decide to subsidise gas,” Ebba Busch, Sweden’s energy minister, said before the ministerial meeting.
“We need to make sure that countries like Sweden who have done our homework, moved away from gas, moved away from fossil fuels, are not being punished in this system.”
The commission also plans to propose a measure to make the best use of existing grid infrastructure and improve its productivity and signaled potential legislation to cut electricity taxation and remove some non-energy levies from power bills.
To limit the impact of carbon prices on electricity, the EU regulator will put forward an adjustment of the Market Stability Reserve, a special mechanism that automatically controls the supply of emissions permits and absorbs the extra allowances from the market.
The goal is to “more effectively address excessive price volatility and keep prices in check in the short term”.
European gas prices reached the highest in three years during the first week of the Iran war but are still far below the records reached during the 2022 energy crisis.
They are hovering near €50 a megawatt-hour compared with an all-time peak of €300 a megawatt-hour four years ago, when the EU’s former top supplier Russia cut supplies following its invasion of Ukraine.
Still, the gas price rally comes at a tricky time for Europe, with its reserves nearly depleted towards the end of the heating season and fewer seaborne cargoes arriving this month.
The bloc will have to buy more liquefied natural gas this summer to replenish its inventories for next winter, vying with Asian buyers for limited supplies if the Strait of Hormuz remains effectively shut.
Some member states have already witnessed strains on diesel and jet fuel supplies, according to people with knowledge of EU meetings on energy.
Fuel prices are a politically sensitive issue, underlined by the yellow-vest protests that shook France in 2019. — Bloomberg
