Page 7 - FSUOGM Week 38 2022

FSUOGM SPECIAL COMMENTARY FSUOGM

ING: Energy price caps

are appealing, but are

not without risks

All in all, price caps sound appealing but in practice they are hard to implement and not

without potential drawbacks.

EUROPE ON 14 September 2022, Ursula von der Leyen, cap on all the gas that Europe imports, but that
president of the European Commission (EC), would limit the ability to import liquefied natu-
announced in her State of the Union speech a ral gas (LNG) and threaten our energy security
set of proposals to mitigate the impact of high as a result. Yet others have called for a price cap
energy prices. These are: on retail energy bills, like the ones that exist in
Joint gas storage: On average natural gas stor- the UK, which could be a game-changer for
age capacity across Europe stands at 84%, with utilities and might trigger support schemes in
the goal to reach maximum capacity in the com- order to keep delivering energy to households
ing months. and businesses.
Hydrogen: €3bn funds to facilitate hydrogen All these price caps, for good reason, did not
development in order to switch from a niche make it to the final EC proposal. The proposal
market to a mass market product. introduces a price cap on power generated by
Energy savings: Member states are asked to non-fossil fuels, in particular from solar panels,
reduce gas and electricity consumption by 10% wind turbines, hydropower and nuclear power
with an additional 5% during peak hours. plants.
Taxes on fossil fuel companies: The EU will
apply additional taxes to fossil fuel suppliers Capping the price of low-cost technologies
given that the current crisis partly fuels higher The proposal splits the merit order into two;
profits from surging oil and gas prices. one part for power-generating technologies
Price cap on electricity: The EU proposes a with low marginal costs (wind, solar, nuclear
€180/MWh day-ahead wholesale price cap for power, hydropower and lignite power plants)
low-cost technologies. The scheme is expected and a part for technologies with high costs
to bring some €140bn in excess revenues that (plants that run on brown coal, oil and gas).
would be redistributed to the final energy Once the wind is blowing, the sun is shining,
consumers. or a nuclear or hydro plant is running, it costs
This article is about the price cap on electric- very little to produce an extra MWh of electric-
ity. Von der Leyen previously said: “Skyrocketing ity. But coal and gas-fired power plants and oil
electricity prices are now exposing the limita- aggregates need to buy expensive fuel.
tions of our current electricity market design… The merit order ensures that the cheapest
We need a new market model for electricity that technologies enter the market first but implies
really functions and brings us back into balance”. that the price is set by the most expensive tech-
nology to meet power demand. In the current
Which price cap to implement? market, those are the gas-fired power plants as
It is not clear what a new market design would gas prices have increased tenfold. What follows
look like, but many politicians have called for is an extremely high power price for all the tech-
price caps, albeit in many different forms. Some nologies in the merit order. A price that meets
have argued for a price cap on Russian gas, a lot of resistance; why should technologies get
which is essentially a trade policy that would a power price of hundreds of euros per mega-
likely result in a full stop to gas deliveries by watt-hour (MWh), while they were already prof-
Russia to Europe. Others have called for a price itable at power prices between 50-100/MWh?

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