European Commission President Ursula von der Leyen on Wednesday pledged “deep and comprehensive reform” of the European Union (EU) electricity market and promised to continue exploring ways to bring down natural gas prices. 

Europe

The EU is being “tested” not only with Russia’s war on Ukraine, but “a war on our energy. It is a war on our economy,” she said during a State of the Union address before the European Parliament.

Von der Leyen supported calls for a decoupling of prices in the electricity markets. The electricity market is “not fit for purpose anymore,” she said. “So we have to decouple the dominance of the price of gas on the price of electricity.”

[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]

The reform for decoupling prices is “because the price of gas, and therefore in most countries of electricity, has increased so dramatically since 2020. Now the disconnect has to be achieved, and that can be done in a number of ways, but it is quite complicated,” said Jonathan Stern, a research fellow at the Oxford Institute for Energy Studies

Von der Leyen emphasized the European Commission was reviewing several proposals to resolve high prices and supply issues, and intends to work to establish a “more representative benchmark” price for gas than the Dutch Title Transfer Facility (TTF), a pipeline benchmark that is no longer representative of the increased use of liquefied natural gas.

The Commission rolled out a package of proposals Wednesday to help reduce energy bills for consumers. Among them is a uniform price cap on the excess revenues made by inframarginal power plants, or plants that usually do not set the marginal price, including nuclear, lignite and most renewables.

The proposal calls for capping revenue at 180 euros/MWh. Excess revenues would be collected by member states and used to lower household energy bills.

“This will allow producers to cover their investment and operating costs without impairing investment in new capacities in line with our 2030 and 2050 energy and climate goals,” the Commission said. 

Another proposal is a windfall tax on the huge profits reaped by fossil fuel companies. Excess profits would also go to consumers and could raise more than 140 billion euros to help with high energy bills.

“In these times it is wrong to receive extraordinary record revenues and profits benefiting from war and on the back of our consumers,” von der Leyen said. “In these times, profits must be shared and channeled to those who need it most.”

Curbing Power Consumption

Another proposal is to lower electricity consumption by 5% during peak hours to reduce prices and cut overall electricity demand by at least 10% until March 31.

The Commission did not introduce a proposal to cap prices for Russian and all other gas imports, following demands last week from member states. The Commission said price caps could see sellers offer their gas supplies to more competitive buyers outside of Europe.

“Basically it depends on how much governments are willing to take over gas markets and abandon the market model which was developed over the past 30 years,” Stern said of implementing the proposals. 

Reducing dependency on Russian gas is a priority. Imports from Russia have fallen from 40% in 2021 to 9% recently. EU gas storage has reached 84% of capacity, exceeding the continent’s targets heading into winter, von der Leyen said. The EU must continue to diversify supply away from Russia, reduce its heavy dependency on fossil fuels and invest more in renewables, she added.

“Russia keeps actively manipulating our energy market…they prefer to flare the gas instead of sending it to Europe according to the contracts,” von der Leyen said. “I want to make it very clear: the sanctions are here to stay…This is time for resolve and not appeasement.

“The good news is: this necessary transformation has already started,” she said, mentioning hydrogen as a “game changer” for Europe. The Commission plans to create a new European Hydrogen Bank and to secure around 3 billion euros of investments for the sector.