Brussels mulls EU-wide gas reserve to prevent energy price volatility

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Brussels has confirmed it is willing to explore the creation of an EU-wide strategic reserve for natural gas that would guarantee stable and predictable supplies for the whole bloc while avoiding major price fluctuations, such as those currently sending electricity bills soaring.

The idea of a strategic gas reserve has already been floated by a small group of EU countries, including France and Spain, as a potential solution to the ongoing energy crunch.

The European Commission has now thrown its support behind the initiative, which could mimic the joint procurement that Brussels organised to purchase anti-coronavirus vaccines for all EU countries.

Although gas represents over a quarter of the EU’s overall energy consumption, storage facilities are only available in half of the member states. The Commission believes a more “integrated European approach” could lower costs and cushion the impact of price volatility. The collective scheme would be voluntary and aligned with EU competition law.

But the Commission underlined that such an idea does not provide immediate relief for the present crisis and, should it be eventually established, it would serve to palliate the next energy crunch.

In the meantime, Brussels suggests EU countries introduce short-term measures to help counter the hikes in electricity bills, including income support for vulnerable households, subsidies for struggling companies and tax reductions. All these solutions, the Commission noted, must be temporary, tailored and targeted, taking into consideration the social and economic features of each country.

So far, 20 member states have said they intend to use these tools to provide relief for their citizens and business. But as energy prices continue to be alarmingly high, some capitals are becoming increasingly vocal about the need for far-reaching and exceptional remedies to rein in the market, a path the Commission refuses to follow, at least for the time being.

Brussels is aware the current crisis is caused by the basic dynamics of supply and demand: the economic recovery has deepened Europe’s and Asia’s needs for electricity, but the main energy suppliers, like Russia, have been unable – or unwilling – to meet this rising demand, resulting in a marked and very sudden increase in prices all around the world.

Since Europe and Asia are net gas importers and highly dependent on foreign suppliers, they are much more exposed to the ups and downs of the energy market. Consequently, wholesale prices for natural gas in Europe have skyrocketed by over 420% in the last year. This, in turn, has sent electricity prices soaring by over 230% in the same period.

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In Europe, the wholesale price for electricity is determined by the last production plant that is needed to meet the total demand. Since gas-fired power stations are usually the ones used at peak times, the price of natural gas directly impacts the overall price of electricity, even if renewable sources, which are cheaper, are employed along the process.

This “coupling” of gas and electricity prices has been criticised by several member states, most prominently France, which relies heavily on nuclear reactors. Paris is calling for an urgent “decoupling”, but the Commission believes this marginal pricing method is the “most efficient for liberalised electricity markets” and the “most suited” to foster cross-border trading.

Short-term measures

Not all member states share France’s sense of urgency and appetite for fundamental reform. The energy mix varies widely across the bloc and so does the burden of the crisis.

In a document presented on Wednesday afternoon, the Commission opted for a moderate path, preferring to err on the side of caution to ensure the delicate market is not distorted by heavy-handed state intervention.

Brussels recommends member states to use the revenues obtained from the Emissions Trading System (ETS) – an EU-wide system that puts a price on CO2 emissions – to finance income support for vulnerable households, such as vouchers or partial pill payments. In the last 12 months, the ETS has amassed more than €26 billion in revenues from the selling of carbon permits that polluting companies need to buy and can trade among themselves.

In the face of skyrocketing gas prices, some governments have been forced to rely on coal-powered stations, which emit a higher level of carbon dioxide and therefore require more ETS permits to offset. This has caused ETS prices to double in less than a year, a surge that the Commission estimates is contributing to over a fifth of the energy crunch.

“The effect of the gas price increase on the electricity price is nine times bigger than the effect of the carbon price increase,” the document says.

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Several governments have raised the alarm over market speculation in the Emissions Trading System, but the executive has not found any evidence to sustain the claims. However, it vows to strengthen surveillance in the ETS and across the general energy market to crack down on anti-competitive behaviour. A group of MEPs have asked the Commission to investigate Gazprom, the leading Russian gas exporter, for its alleged role in the soaring prices.

Additional measures that national governments can offer include legal safeguards to guarantee that lower-income households don’t see their electricity cut off and state aid – mainly subsidies – for companies that are struggling to pay their bills and looking to accelerate their renewable input.

Taxation cuts can also protect consumers, the executive says. On average, taxes and levies account for 41% of households’ electricity prices, giving member states considerable margin to offer a temporary reduction or even a total exemption for households most at risk. Countries can also slash the VAT rate all the way down to 0.5% – the minimum allowed under EU law.

“Now – I would say – the ball is in national governments field,” Dimitri Vergne, a sustainability policy officer at the European Consumer Organisation (BEUC), told Euronews.

“Its up to national governments – some have already started doing so – to implement this package of measures and really translate this nice recommendations into tangible protection for consumers.”

A vision for the long haul

Beyond immediate needs, Brussels said member states should focus on the larger and more complex long-term objective: the green transition.

The Commission has dismissed critical voices that blame the energy crunch on the European Green Deal and has instead doubled down on its commitment to climate neutrality, arguing the present situation illustrates the bloc’s dependency on costly and dirty fossil fuels.

“The current situation is exceptional, and the internal energy market has served us well for the past 20 years,” said Kadri Simson, the European Commissioner for energy.

“But we need to be sure that it continues to do so in the future, delivering on the European Green Deal, boosting our energy independence and meeting our climate goals.”

Simson urged countries to speed up auctions for renewable energy and facilitate the construction of new facilities, while making it easier for citizens to install their own in-house green methods, like solar rooftops. She also asked governments to draw “the correct conclusions” from the crisis.

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As part of the EU’s recovery fund, member states have earmarked more than €177 billion for climate action projects, including the renovation of public and private buildings, which together represent 40% of total energy consumption and 36% of greenhouse gas emissions.

But the greatest benefits from the green transition will take years to materialise, leaving natural gas in a privileged position to serve as transitional energy. The Commission is already working on several proposals, including a hypothetical common reserve, to decarbonise the gas sector and guarantee the security and stability of supplies.

The Commission will also work with member states to reinforce the resilience of energy systems and protect them from cyber threats and extreme weather. Weaker-than-expected wind speeds during the summer pushed countries to use more natural gas, diminishing reserves for winter. (Current EU gas storage levels are slightly above 75%, below the 90% seen on average over the past decade.)

Additionally, the EU plans to set up a €72.2 billion Social Climate Fund to combat energy poverty, but this scheme is contingent upon the creation of a new, standalone Emissions Trading System that will put a price on the fuel, including gas, used to heat buildings and power transport.

The idea has come under intense fire, with several MEPs and experts warning ordinary citizens will have to foot the final bill. The energy crunch is poised to give further ammunition to critics, although the Commission maintains that all carbon should be taxed, regardless of its origin or purpose.

European leaders are set to discuss all these measures next week during a two-day European summit in Brussels. Electricity bills are a rare topic of conversation for such high-level meetings, but the gravity of the situation has thrust the debate to the very top of the political agenda.

The crisis shows no signs of abating: the Commission estimates natural gas prices will remain high across winter, when energy consumption is expected to rise as temperatures fall, and stabilise from April onward.

“Winter is coming,” said Simson.

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