Europe needs to drastically reform its energy market to tackle the ongoing price crunch, Spain told the European Commission in a letter sent on Wednesday (23 February), just before the conflict in Ukraine caused energy prices to spike.
“The sustained surge in energy prices,” coupled with “geopolitical tensions” in Ukraine will damage Europe’s economic recovery from the COVID pandemic and attempts to transition away from fossil fuels, the letter warns.
“This situation of extraordinarily high-energy prices will probably last longer than expected a few months ago when the European Commission presented its toolbox” to tackle rising energy prices, the letter says.
On top of this, EU countries cannot sustain the patch up measures they have been rolling out to support those impacted by the high prices, adds the letter, signed by Spain’s economy minister Nadia Calviño and minister for ecological transition Teresa Ribera Rodriguez.
Spain’s calls for reform comes ahead of a European Commission communication on energy prices, due to be published next week. A leaked draft of the communication warned the energy crisis would last longer than expected and was likely to continue into 2023.
Electricity prices are driven by “marginal” production capacity available from gas power plants whose cost have surged since last summer because of a supply squeeze from Russia and lack of storage.
According to the letter sent by Madrid, the electricity market price in Spain stood at a record €112/MWh in 2021, even though cheap renewable generates 45% of the country’s power production.
And high energy prices are not just a problem in Spain. The huge increase in wholesale gas prices has caused people’s energy bills to skyrocket across Europe. On average, Greeks had to pay an additional €100 in December alone, and Italians can expect to pay an extra €900 in 2022, according to the NGO Global Witness.
In the letter, Calviño and Ribera warn that the budgetary cost of dealing with this crisis is approaching the amount available under the EU’s COVID recovery plan, with the fiscal cost of protecting households and companies in Spain now exceeding €7 billion.
EU countries are having to use very large amounts of public money “to patch a problem which requires more structural solutions,” the letter argues. And the ability to aid EU citizens is highly reliant on the budgets of individual member states, leading to an uneven treatment of citizens and businesses which is harming the EU single market, it adds.
In the letter, Spain welcomed the European Commission’s plans for additional measures “to transfer rents from power generators to consumers and to limit the contagion effect of gas prices on electricity prices,” according to Calviño and Ribera.
But the two Spanish ministers also propose a series of “new and powerful tools” for EU countries beyond what was seen in the leak.
“First, the formation of wholesale electricity prices should be decoupled from the high volatility of gas prices by having an ’emergency brake’ that would split the price-setting mechanisms of electricity markets,” reads the letter. “For instance, introducing a price cap to electricity generated from natural gas sources with an ex-post mechanisms to guarantee cost recovery of gas-fired power plants,” it continues.
Spain welcomes European Commission plans to open a discussion on the high windfall profits made by energy companies on the back of the current historic prices. However, it says any measures to fix this need to be implemented quickly.
During the energy crisis, Spain introduced a new tax on windfall profits of power companies that caused an uproar among electricity producers.
Industry body Eurelectric has warned against replicating this at EU level.
“Such measures heavily damage investor confidence and jeopardise trust in the EU integrated electricity market,” said Jean-Bernard Lévy, the CEO of French utility EDF who is also president of Eurelectric.
“Indeed, there is no shortage of funding for renewable and low emissions investments, but there is a growing shortage of confidence in the stability of the regulated framework and in the stability of tax policies,” he warned the European Commission in a letter.
Meanwhile, environmental organisations have criticised the windfall profits of fossil energy companies. According to the NGO Global Witness, eight fossil fuel companies made over $119 billion since the energy crisis began in the Autumn.
That includes Gazprom, Russia’s state-owned gas monopoly, which reported its highest ever quarterly profits in November 2021.
Fears over Ukraine
Since the Spanish government’s letter was sent on Wednesday, the unfolding conflict in Ukraine has further fuelled energy prices hikes and gas shortages.
“Geopolitical tensions could further increase prices in international energy markets,” noted Calviño and Ribera.
“Furthermore, as the cost of energy continues to grow, net financial flows are going to fossil fuel exporting countries to the detriment of European economies and jeopardising the impact of Next Generation EU funds in transforming our economies towards net zero,” the ministers add.
While Moscow is not explicitly mentioned, there are growing concerns about energy supplied from Russia, which provides 40% of Europe’s gas.
There are also concerns around how the escalation of violence in Ukraine caused energy prices to rise. On Thursday (24 February), European fossil gas prices surged a record 62% after the first bombs fell.
In Europe, politicians are now questioning whether the EU should be buying fuel from a country breaching international law in such a blatant way.
“We will hold the Kremlin accountable,” declared European Commission chief Ursula von der Leyen said after an EU summit on Thursday evening (24 February). A sanctions package discussed by EU leaders on Thursday, will have “maximum impact” and consist of hitting five key areas: the financial sector, energy sector, transport sector, export controls and visa policy.
> Read the full letter below or download here:letter
[Edited by Frédéric Simon]