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Industrial Policy

The EU’s incredible shrinking energy crisis plan

European Commission President Ursula von der Leyen gives her annual update on the state of the EU on Wednesday — and the key issue is certain to be the bloc’s energy price emergency.

But she has already had to pare down her ideas due to resistance from member countries — and the prospect of a quick fix ahead of the winter heating season is receding.

Last week, the Commission and member countries were circulating briefing papers brimming with ideas. Von der Leyen leaped into the spotlight and put forward five of them: Mandatory measures to reduce electricity demand; a cap on revenues for companies generating electricity from low-cost sources, with those “unexpected profits” going to help consumers; a solidarity tax on fossil fuel companies making big profits; increased liquidity support for ailing utility companies; and capping the price of Russian gas imports.

EU energy ministers met Friday for a crisis summit and backed everything except for the price caps — but there wasn’t much consensus about the details of the plans. They’ll give it a second try when they meet again on September 30.

This week, the Commission said it’s working on four ideas, not touching on liquidity support but adding measures to support some power users.

Here is what von der Leyen will likely address in her speech — and why it might not add up to a quick a fix.

1. Mandatory electricity rationing

Brussels already succeeded in getting EU countries to agree to cut their gas use 15 percent — and von der Leyen is gunning for the same formula on electricity.

Documents obtained by POLITICO show the Commission wants to mandate that countries cut power use by 5 percent during peak hours, and voluntarily trim overall monthly electricity demand by 10 percent.

That could be done by paying certain industries to shut off as needed, ideally with cross-border coordination so supply chains on key products aren’t disrupted.

Countries would be given significant wiggle room to choose their “peak” times to reduce power usage; one EU diplomat from an electricity exporting country complained this would blunt the effectiveness of the measure.

And while in normal situations cutting demand lowers prices, skeptics argue von der Leyen is missing the mark because she isn’t addressing speculative trading on energy markets and the structure of the EU’s power market, which sets electricity prices based on the final, and most expensive input — in this case natural gas.

Countries would be given significant wiggle room to choose their “peak” times to reduce power usage | Christopher Furlong/Getty Images

Countries last week asked Brussels to instead activate an emergency brake on how high final electricity prices are allowed to climb on energy exchanges. ACER, the EU association of energy regulators, said it would consider such requests this month from national power operators — but a final decision could take up to six months.

2. Taxing windfall profits

Electricity producers not using natural gas to generate power — think renewables or nuclear — have been making record revenues from the energy crisis, and Brussels wants to claw back some of that cash to offset higher power bills.

The Commission has floated a two-pronged approach.

The first involves skimming profits from all non-gas power producers when they sell above €180 per megawatt-hour. Fossil fuel companies would also have to fork over a portion of their 2022 earnings. The cash would be used to help strapped consumers.

But there’s worry that skimming profits from renewable energy companies could discourage investment at a time when Brussels wants to accelerate the pivot away from fossil fuels.

There’s also a fierce debate over whether such a levy is in fact a tax — a point argued by countries including France and Hungary — which would means it could only be adopted unanimously by member countries, rather than by qualified majority under an emergency procedure Brussels is pushing for.

3. Cheaper power for certain customers

Countries will be able to set cheap, regulated electricity tariffs for qualifying households and small- and medium-sized businesses, in some cases compensating producers for supplying that power at a loss.

The Commission is careful in this week’s draft legislation to warn that such rates shouldn’t be too low, in case they discourage users from saving power.

The measure involves cross-border agreements to share clawed back windfall profits to ensure that all countries — not just the wealthiest — can help offset their power prices.

Expect some tough haggling between countries that are net power exporters — like Sweden, Germany, Bulgaria and Spain — and net importers such as Italy, Finland, Hungary and, so far this year, France.

4. Laxer energy trading rules

Brussels and EU countries both agree something should be done to help utilities buy more easily on energy exchanges. High prices have driven up the amount of cash they need to pony up to participate in real-time bidding.

Christine Lagarde made it clear she is against loosening any requirements that could potentially open the door to unscrupulous trading | Pool photo by Ronald Wittek/Getty Images

Some countries — notably Sweden, Finland and Germany — have taken matters into their own hands, offering billions in credit lines to energy companies to pay debts, buy up natural gas, and generally prevent utilities from defaulting.

But while the Commission is open to rolling back some trading rules, European Central Bank President Christine Lagarde made it clear she is against loosening any requirements that could potentially open the door to unscrupulous trading — and lead to a repeat of the 2008 financial crash.

“We stand ready to provide liquidity to banks,” Lagarde said Friday. “Not to energy utility firms.”

No draft EU legislation has yet been circulated on this, though von der Leyen is expected to reference the issue in her Wednesday speech.

5. Gas price conundrum

Von der Leyen is in a fix over tackling the root cause of the current crisis: natural gas prices.

Her proposal to set a price ceiling on the Russian gas entering the bloc was widely panned last week. That’s because the Kremlin has already slowed gas flows westward to little more than a trickle — meaning any maximum price on Russian gas would have little to no influence on what most buyers are paying.

Some countries still receiving Russian gas are also wary of retaliation by Moscow. They don’t want to lose what little supply is still coming.

At least 15 EU countries are in favor of a price cap on all natural gas bought and sold in the bloc, not just gas from Russia. But the Commission has repeatedly warned such sweeping restrictions would risk the bloc losing out on scarce global supplies, as markets like Asia are willing to pay more.

This more contentious proposal will be debated in detail by EU leaders on October 7 and October 20.

Bjarke Smith-Meyer, Elisa Braun, Jacopo Barigazzi, Louise Guillot, Barbara Moens and Charlie Cooper contributed reporting.

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