The Commission’s proposals for the decompression of accuracy and adequacy – What is the Iberian model – Berlin on the path of Athens, considers taxation of 90% of the surplus profits in the electricity companies
“Yes” of “27” to its revised proposals Commission predicts the draft conclusions leaked to Reuters ahead of tomorrow’s Summit.
According to Reuters, the leaders of the member states of the European Union will adopt the proposal of the three axes of the European Commission, but with asterisks, as they ask Ursula von der Leyen and their colleagues to soon present a new proposal, which it will concern the ceiling on the price of natural gas, which is used in the production of electricity, as it is estimated that in this way the accuracy in the current will be scaled down.
Its revised draft conclusions Summit said EU leaders would broadly support the proposals – including plans to launch an alternative reference price for liquefied natural gas and launch a common gas market between EU countries.
It is noted that each of the proposals is required to receive the support of the enhanced majority, i.e. 65%, or otherwise 15 of the 27 countries.
The Commission’s proposals did not include an immediate cap on natural gas prices, which most EU countries say they want, but Brussels has been asked to draw up another proposal to set a temporary price cap on Title Transfer Facility (TTF) under certain conditions.
EU leaders appear ready to back that idea, asking Brussels to consider a “temporary dynamic price corridor” in gas trading, according to their draft conclusions.
What is the Iberian mechanism?
A proposal that is strongly discussed at the level of states in Europe is the imposition of a ceiling on the price of natural gas, which is related to the production of electricity. The specific plan has many devotees and is already being implemented in Spain and Portugal.
That idea – known as the “Iberian mechanism” – was not included in the EU’s proposals. However, European Commission President Ursula von der Leyen said Brussels was still evaluating the idea, including how to finance it.
Nevertheless, the issue of the ceiling is dividing Europe. France and others support it as a way to curb electricity prices, while Germany and the Netherlands fear it will increase demand for natural gas and express strong objections.
The draft conclusions stated that a price cap for natural gas used to generate electricity should avoid an increase in natural gas consumption, but did not specify how this would be achieved.
The Commission’s proposals
Common gas market from the EU
The Commission proposes common natural gas markets to negotiate better prices and avoid competition between member states.
The Commission will commission a service provider to organize EU-wide demand aggregation, pooling gas import needs and looking for offers on the market to match the demand. It proposes the mandatory participation of the member states in joint procurement, to collect at least 15% of the storage filling. Companies will be able to form a European gas purchasing consortium, under EU competition rules. Joint purchases will help smaller member states and in particular companies, which are in a less favorable position as buyers, to access in natural gas volumes with better conditions.
The Regulation also includes provisions to enhance the transparency of the intended and final gas supply markets in order to assess whether the objectives of security of supply and energy solidarity are being met. The Commission should be informed before the conclusion of any natural gas market or memorandum of understanding with a volume of more than 5 TWh (just over 500 million cubic meters) and may issue a recommendation in the event of a potentially negative impact on the functioning of the common market, the security of supply or energy solidarity.
Dealing with high gas prices
The Commission proposes to establish a new pricing index for Liquefied Natural Gas (LNG) by March 2023 and in the interim proposes to establish a price correction mechanism to establish a dynamic price ceiling for trading on the TTF natural gas exchange.
“The European natural gas exchange, the TTF, no longer accurately reflects the price of LNG transactions in the EU,” the Commission stresses. Therefore, the Commission proposes to develop a new complementary price reference point with ACER (European Agency for the cooperation of energy regulators) to address this ‘systemic challenge’. The new benchmark will provide stable and predictable pricing for LNG transactions. The Commission will commission ACER to create an objective daily price assessment tool and, in then a reference point that could be used by energy market operators to adjust the price in their natural gas contracts.
Until the above is done, the Commission proposes the establishment of a temporary mechanism for limiting prices, through the European Gas Exchange (TTF), which will be activated when necessary. The price correction mechanism will establish, on a temporary basis, a dynamic price limit for transactions on the TTF. Trades at a price higher than the dynamic limit will not be allowed to take place on TTF. This will help to avoid extreme volatility and excessive prices. In addition, to limit excessive price volatility and prevent extreme price increases in energy derivatives markets, the Commission proposes to introduce a new temporary intraday price spike to be generated by EU derivatives exchanges. This mechanism would protect energy operators from large intraday price fluctuations.
Solidarity mechanism for possible shortages
The Commission proposes a solidarity mechanism between Member States in the event of supply shortages.
The Commission is closely monitoring measures to reduce natural gas demand. In August and September, gas consumption in the EU was around 15% lower than the average of the previous 5 years. Similar efforts will be required every month until March, according to the Council regulation. Member States will report every two months on their progress. The Commission stresses that it is “ready to activate the EU alert” or to review the reduction target if current measures prove insufficient. To strengthen preparedness for potential emergencies, the Commission is proposing measures allowing Member States to further reduce non-essential consumption to ensure gas is supplied to essential services and industries. “This should in no way affect the consumption of households that are vulnerable customers,” the Commission stresses.
Since not all Member States have concluded the necessary bilateral solidarity agreements, the Commission is proposing rules to ensure that each Member State facing an emergency receives gas from others, in return for a “fair compensation”. The solidarity obligation will be extended to non-connected Member States with LNG installations, provided that the gas can be transported to the Member State where needed. To optimize the use of LNG and pipeline infrastructure, the Commission proposes new tools to provide information on available capacity and new mechanisms to ensure that capacity is not tied up and not used by market players. It is also proposed to protect critical infrastructure in light of the suspected sabotage of the Nord Stream 1 & 2 gas pipelines.
Berlin on the path of Athens: Taxation of 90% of super profits in electricity companies
The German government is moving to impose a ceiling on electricity prices for households and industry to bear the brunt of rising energy costs. According to a German economy ministry document obtained by Reuters, Berlin is considering taxing the country’s power companies on excess profits to subsidize the cap and stabilize the grid.
If implemented, this project will receive parallel funding from the €200 billion support package announced in September by the Soltz government. It is recalled that this package aims to support households and businesses to cope with rising energy prices.
The draft does not indicate the exact limit, but it is stated that it will have a similar form to the “brake” that has been announced for natural gas in the country. But unlike the one presented a few days ago, there will be no lump sum payment to cover a month’s bills this year.
As part of the plan, Berlin may proceed to deduct 90% of excess profits (those that exceed production costs). With regard to spot prices, i.e. the next day’s market, the tax will be applied retroactively from March, while for future prices it will be applied from December.
The plan will be presented to Germany’s cabinet on November 18 and notes that electricity generation from coal, natural gas and biomethane will be excluded from the measures due to high production costs.
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