As energy prices spike, EU points to long-term fixes

by Frederic Simon

The European Commission is monitoring the evolution of electricity prices “very closely,” the EU’s Energy Commissioner Kadri Simson has said, pointing to long-term fixes like investments in energy savings and renewables as the main answer at European level.

“Higher electricity price is driven mainly by global demand” for energy, including gas prices which have been rising steadily since January, Simson said on Friday (17 September).

And EU countries have responded separately, because “social schemes to support the most vulnerable are designed uniquely to fit each member state,” she explained during a press conference held at the ITER experimental fusion reactor in Southern France.

In fact, when it comes to social or taxation matters, which can alleviate pressure on consumer bills, the EU is mostly powerless, she seemed to admit.

In Spain, the government introduced a temporary tax on windfall profits from energy firms, which could generate €2.6 billion until its planned expiration at the end of March. And a special tax on electricity will drop from 5.1% to 0.5% – the minimum allowed by EU law – until the end of the year.

In France, an additional €100 payment will be made to poorer households who are already eligible for the government’s energy voucher scheme.

At the European level, meanwhile, “there are several solutions that will help mid and long term,” Simson explained, saying first among them is to decrease the power sector’s reliance on gas and coal, whose prices have skyrocketed in recent months.

“Renewables are still producing at the best price,” Simson said, “so investments into renewables will stabilise the price in the future,” Simson said, echoing similar comments made earlier in the week by EU climate chief Frans Timmermans.

Other solutions include better-integrated electricity markets across EU borders and investments in energy efficiency, such as building insulation, Simson added.

Taxes: a national prerogative

But when it comes to taxation, this is something that falls under the remit of EU countries themselves.

“Wholesale electricity market is approximately one-third of the bill” paid by households, Simson explained. “And on top of that, there will be a grid component and levies and taxes. And these are different in every member state, so this also has an impact.”

In Spain, the socialist-led government considered it a “moral duty” to intervene and reduce energy bills, in particular for poorer households. But the new tax on windfall profits of power companies caused an uproar among electricity producers, who said it creates a climate of legal uncertainty.

“Is it desirable to destroy the market economy? We need to be clear about how detrimental and massive the intervention on the Spanish market is,” said Kristian Ruby, secretary-general of Eurelectric, the EU power industry association.

Ruby said some power generators in Spain have sold their electricity in a long term power purchase agreement for €28 per megawatt hour (MWh) over a 10-year period. “Now, they’re selling the power for €28, and they’re forced, at the same time to surrender €50 to the state. I mean, it’s huge!” Ruby told EURACTIV.

The result, he warned, is a loss of confidence in the Spanish electricity market which has a chilling effect on investments at a time when billions of euros are needed for the transition to renewable energies.

“It means the cost of capital goes up, and that the cost of the transition becomes expensive.”

According to Ruby, a preferable move is to cut taxes or do what the French government has done with its energy voucher scheme for the poor. Support for vulnerable families “is much more desirable than arbitrary and illegal interventions like we’re seeing in Spain,” he said.

“The other way to go about it that we prefer is to basically reduce taxes on the electricity bill,” Ruby said. “Taxes make up between a third and 40% of a retail bill so… by removing a third of the bill, you’re really making a huge effort difference for the customer,” Ruby said.

To cushion the impact on consumers, EU countries may also use their national recovery and resilience plans drawn up in response to the coronavirus pandemic, Simson pointed out.

With funding made available under the EU’s €750 billion recovery plan, EU countries will be able to co-finance those “necessary investments to make homes more energy efficient so that heating costs can come down significantly,” Simson said.

“And by using less energy, they will meet both climate goals and help consumers,” she added.

*first published in: www.euractiv.com