With the steep increase in energy prices across Europe, the European Union has agreed a package of emergency measures to tackle rising energy costs and reduce bills for consumers. This Just the Facts looks at how the energy market in the European Union works and the emergency interventions agreed by the EU in September 2022.
How does the energy market in the EU work?
Under Article 194 of the Treaty on the Functioning of the European Union, energy policy is a shared responsibility between the European Union and Member States. Each Member State can determine its own energy mix, but they are also subject to common energy market rules.
As such, energy produced in one Member State can be delivered to consumers in another using cross-border infrastructure. For example, the Celtic Interconnector is a planned undersea direct link between Ireland and France to allow the exchange of electricity. European Movement Ireland, with the European Parliament Liaison Office in Ireland, held a joint webinar on the Celtic Interconnector Project, which is available is watch here.
The interconnected market aims to boost competitiveness between energy retailers, thereby securing a better deal for consumers, ensuring security of supply by sharing energy across borders, as well as supporting the green transition by connecting more renewable energy sources over a wider area. Overall, the purpose of the integrated EU energy market is to ensure ‘secure and affordable’ energy supplies to all EU citizens.
The body responsible for regulating the EU’s energy market is the Agency for the Cooperation of Energy Regulators (ACER). ACER is independent from the European Commission, Member States and energy companies. Its role is to assist and coordinate the work of national regulatory authorities. The national regulatory body of Ireland is the Commission for Regulation of Utilities (CRU).
The wholesale energy market in the EU follows a marginal pricing model, also known as the pay-as-clear model. Electricity producers across the EU, from wind farms, nuclear, coal and gas plants, bid into the market with the price of their production costs.
The cheapest electricity is bought first, which typically comes from renewable sources, as they are produced at low cost. The bidding process finishes with the most expensive sources, which in Europe is gas due to its high production costs. Once the full demand for energy has been satisfied, the price of electricity is determined by the price of the last producer.
The justification for this “is that because all generators sell their power at the same price, the cheaper renewables generators end up with a bigger profit margin – a stimulus that incentivises more investment in the renewable generation Europe needs to reach climate change goals”.
Before Russia’s invasion of Ukraine, some EU Member States relied heavily on gas from Russia. In 2021, this ranged from 92% in Latvia, 86% in Austria, to 49% in Germany. Russia accounted for 0.1% of Irish gas imports in 2016, according to trade data from the Central Statistics Office, the last time Ireland imported gas from Russia. The UK accounted for 96% of Irish gas imports in 2021.
What are the EU emergency intervention proposals?
Wholesale energy prices began to rise rapidly in July 2021 and reached record levels in 2022, following the Russia’s invasion of Ukraine in February 2022.
On 14 September, the European Commission brought forward proposals “on an emergency intervention to address high energy prices”. These consist of three strands to help European consumers pay their energy bills and to speed up the green transition.
The first aims to reduce electricity consumption. This will be achieved through a voluntary overall reduction target of 10%, and a mandatory reduction target of 5% of electricity consumption in peak hours. It is up to each Member State to determine which measures they will use to achieve this demand reduction.
The second strand introduces a temporary EU revenue cap of €180 MWh for low-cost power generation, such as renewable generation. Revenue generated above the cap will be collected by the governments of Member States and redirected to energy consumers to bring down energy bills.
This may be through compensation for electricity users for reducing their consumption, direct transfers to customers, promoting investments by customers into renewable energy, or through alternative methods determined by Member States. It is estimated that Member States will be able to collect up to €117 billion on an annual basis thanks to this remuneration limit.
The third strand of the intervention sets a temporary solidarity contribution on surplus profits generated from activities in the fossil fuel sectors in 2022, which has also been referred to as a windfall tax.
The solidarity contribution covers taxable profits which are above a 20% increase on the average profits of the three previous years. These revenues will also be collected by Member States and are estimated to generate approximately €25 billion, which is to be used to bring down the energy bills of consumers.
The contribution can be used for a range of measures, such as providing financial support to households and companies, financing cross-border projects in line with REPowerEU objectives or giving financial support to companies in energy intensive industries so long as they are investing in renewable energies. European Movement Ireland has produced an explainer on the RePowerEU Energy Plan, which can be found here.
These proposals from the European Commission were agreed by the Council of the EU on 30 September 2022 and will apply from 1 December 2022 to 31 December 2023. The reduction targets of energy targets will apply until 31 March 2023, whilst the mandatory cap on market revenues will apply until 30 June 2023. The solidarity contribution will apply for one year after entering into force.
Throughout this period, regular reporting will be conducted by the European Commission to monitor the adoption of the measures by Member States, in order to preserve the ‘functioning and integrity’ of the internal market. The intervention marks another stage in the EU’s work to mitigate rising energy prices which began last October.