EU on Energy crisis: Uneven results from the Iberian model for the ceiling – The Commission is preparing an alternative proposal

The expansion of the so-called Iberian model at a pan-European level would have very uneven results among the member states, according to a working document (non paper) of European Commission which was made public.

This Commission document recalls that the European Council of 20 October called on the Commission to urgently submit specific decisions on a series of steps related to the energy market. This includes an interim EU framework for the gas price cap in electricity generation, including a cost-benefit analysis.

In the cost-benefit analysis for a possible pan-European introduction of the subsidy mechanism applied in Spain and Portugal, the Commissionamong others, points out the following:

“One of the most important design choices for a European mechanism is the level of subsidy. Several Member States have proposed a level of subsidy that is significantly higher than that applied in the Iberian Peninsula and which would limit the price of natural gas used to produce electricity to the equivalent of a TTF price of EUR 100-120/MWh.’

The Commission points out that it is very important “to set the subsidized target price high enough so that gas power does not become more attractive (ie cheaper) than electricity generation from other technologies”. However, even with the high ceiling of EUR 100-120/MWh, “gas demand is estimated to increase between 5-9 bcm, mainly due to exports outside the EU”. It is also noted that it is difficult to predict the exact amount of additional gas consumption created by the measure and “the total increase could be higher”.

The Commission then emphasizes that: “The effectiveness of the measure both in terms of reducing electricity prices and avoiding additional gas consumption depends largely on the extent to which increased flows of subsidized electricity to third countries can be avoided.” The Commission explains that there is a risk that exports of electricity, subsidized by the Europeans, will soar outside the EU (e.g. United Kingdom, Switzerland, etc.) “Such exports would reduce the net economic benefits of the measure, as subsidies paid in the EU would substantially reduce electricity prices for non-EU consumers’emphasizes the Commission.

End, the cost of subsidies will vary greatly, according to the Commission: “Member States that rely heavily on gas-fired electricity generation in their electricity system will face the highest costs for the necessary subsidies. This would be the case for example in Germany, the Netherlands and Italy. Member States that are net importers of gas-fired electricity will benefit from subsidized electricity from other Member States. The biggest net beneficiary is estimated to be France.”

Alternatively, the Commission stresses that it is preparing “a longer-term and more structured method to mitigate the impact of high gas prices on electricity prices”, which “will be able to be implemented quickly”. This method focuses on the remuneration of Renewable Energy Sources and other Technologies based on their actual cost of production. “Renewables and other types of power generation infrastructure (eg nuclear) will be paid under contracts for the difference, regardless of the cap price. The price of these contracts will usually be determined by tender and will be a direct function of the actual production costs of the technologies involved. This shift to a contract-based fee-for-difference can be implemented very quickly and easily for new capacity entering the market,” the Commission emphasizes.

RES-EMP

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