Brussels’ political scene took its usual break in August. Drought and temperatures around 40 degrees Celsius may have reminded some people of the tasks ahead, even during the summer break. Next week, things will get back to business, with informal meetings of foreign and defense ministers on the agenda, among other things.
The Commission is stepping up the pace: Next year it intends to present a legislative proposal for a new electricity market design. It wants to take faster and more comprehensive action against high electricity prices than in the past. As Manuel Berkel has learned, a large-scale consultation is to begin this fall. At the end of March, EU heads of state and government urged Brussels to come up with a fundamental solution to high energy prices. Such a swift initiative with legislative character still comes as a surprise, as a new energy market design was previously regarded as a mammoth project that would take many years to complete.
The German industry eagerly awaited it: The Commission has approved the German government’s electricity price compensation scheme. Energy-intensive companies can be reimbursed a total of €27.5 billion in indirect emission costs for the years 2021 to 2030. But some questions remain unanswered, as Lukas Scheid analyzes. Since details of the compensation scheme are still lacking, experts find it difficult to classify the significance of the billion euro sum. Uncertainty is also caused by the ecological measures that Brussels is demanding in return for the electricity price compensation.
The European Commission wants to take faster and broader action against high electricity prices than previously known. A spokesperson for Energy Commissioner Kadri Simson announced concrete steps for a new electricity market design on Thursday in response to a question from Europe.Table: “We plan to launch a broad public consultation in the fall, based on an initial impact assessment setting out the main issues and objectives. This will allow us to present a legislative proposal next year.”
Such a quick initiative with legislative character comes as a surprise. Until now, a new energy market design was considered a mammoth project that would require years of preparation. However, high prices for gas and electricity have been burdening EU members at least since the start of the Russian war against Ukraine. At a meeting in Brussels at the end of March, the heads of state called on the Commission to draft a fundamental solution in addition to immediate measures.
In connection with the legislative initiative and the public consultation, the Commission spokesman yesterday referred to a statement Simson made at the extraordinary meeting of energy ministers in late July: “We are responding to the mandate of EU leaders to look at how our electricity market could function in a situation of extreme volatility and how we can maximize the benefits of renewables in the system.”
Extreme was once again the increase of electricity and gas prices yesterday. Electricity supplies for Germany next year rose by 16 percent to €781 per megawatt hour. Gas for September cracked the €300 mark and reached up to €323, 17 times the long-term average before the war.
Because electricity prices follow gas quotations, demands are growing louder to decouple electricity market design from the cost of the most expensive fuel. As reported by Europe.Table, the German Ministry of Economics, among others, is looking into whether the Spanish model of a gas price cap for power plants could be applied to the entire EU.
The Green-led Economics Ministry’s own parliamentary group in the Bundestag was skeptical about the idea. “Prices for gas and electricity urgently need to be lowered. The solution, however, is not an unaffordable subsidy with taxpayers’ money, but a joint European procurement that puts an end to the current unrealistic prices on the global markets,” said energy policy spokeswoman Ingrid Nestle yesterday.
” Here, joint efforts to reduce the consumption of gas, electricity and the like are the key to bringing global market prices back down to a tolerable level. High demand leads to high prices,” said the Green politician.
The FDP, on the other hand, pointed to the substitution of gas as an energy source. “An electricity price cap at EU level is not the right remedy,” said the Liberals’ economic policy spokesman Reinhard Houben. “We should not use the little gas that is available to us to generate electricity. In mid-July, the German government therefore decided to bring coal-fired power plants back online. It is also considering extending the operating lives of Germany’s remaining three nuclear power plants.”
The change to the market design sought by the Commission meets with approval in the CDU/CSU. “Only a market-based reform is effective, meaning changes to the mechanisms of price setting,” said Markus Pieper (CDU), a member of the European Parliament. He is convinced that pricing must take the specific situations of renewables and fossil fuels into account to a greater extent.
His CSU colleague Angelika Niebler is more explicit: “The reform of the EU internal energy market must be driven forward more consistently. For example, by decoupling pricing for renewables and fossil fuels or revising the market design.” Niebler also believes the marginal cost principle is in need of reform.
Separate electricity markets for renewable and fossil power plants would be a fundamental innovation. However, not only the CDU/CSU is concerned about the current windfall profits from green power plants. The Commission, too, urged that no distinction should be made between the energy sources when it comes to excess profits. Pieper firmly expects that there will be a new energy market design in the EU as early as 2024. Niebler would like to see more proactive action by the German government to reach a consensus between the member states.
Among the short-term crisis measures, there is broad support for price caps if they apply to households’ basic consumption rather than to power plants. The CDU/CSU party leadership already proposed that the government should guarantee low-cost basic gas and electricity. Pieper yesterday added that he would like to limit this measure to two years, until the new market design takes effect.
Green Party parliamentarian Michael Bloss has the same idea, but wants to finance the measure differently: “If it stays cold in our living rooms in winter, Europe will face an existential crisis. To prevent this, we need to discuss a price cap for basic energy needs for everyone in Europe. This must be paid for by the energy suppliers. A gas price cap cannot result in the government financing the billions in excess profits of fossil fuel companies.”
Cornelia Ernst, a member of the Left Party, would prefer to make the measure permanent: “A price cap makes sense to me as a first step and in the short term. However, it must be combined with an excess profits tax. In my opinion, person or household long-term quotas at social prices must be introduced. Those who wish to consume above-average amounts should then be charged accordingly.”
The European carbon price recently rose again to just below €100. Although energy-intensive industries do not have to pay this price for the most part, as they receive free emission allowances, indirect emission costs do have an impact on companies. These are the costs for electricity that they purchase externally and for which the energy suppliers have to pay the carbon price surcharge during generation.
In the face of rising electricity and carbon prices, the fact that the EU Commission approved the German government’s new electricity price compensation scheme last week is a welcome development for the industry (Europe.Table reported). Energy-intensive companies will be able to receive a reimbursement totaling €27.5 billion in indirect emission costs for the years 2021 to 2030.
The approval had long been eagerly awaited in industry circles, says Joachim Hein, energy and climate policy officer at the Federation of German Industries (BDI). Other EU countries were much faster in implementing the new state aid guidelines, which is why the BDI repeatedly urged Berlin and Brussels to hurry. For the industry, this marks the end of a transitional phase of uncertainty. Companies now have until the end of September to apply for electricity price compensation for the past year. Until now, this had not been clear, said Hein.
However, this does not mean that everything has been clarified yet, because the details of the national funding guidelines are still open and will not be announced until they are published in the German Federal Gazette. The sum of €27.5 billion can thus not yet be classified, says Hein. It is not clear how the carbon price in the European Emissions Trading System (ETS) and fuel prices will develop, especially in light of the ongoing war, he adds. “These factors, in particular, have a very significant impact on electricity-intensive industries,” says Hein.
The ongoing uncertainties are also caused by the new quid pro quos that companies have to provide in return for electricity price compensation. Brussels imposed certain climate protection conditions on eligible companies when it revised the state aid guidelines in September 2020.
In detail: Companies must conduct an energy audit or introduce an energy management system and implement its results, provided that the payback period for the necessary investments does not exceed three years. Alternatively, they can invest at least 50 percent of the aid in decarbonization or energy efficiency measures or ensure that at least 30 percent of their electricity demand is met from renewable sources.
However, the BDI believes that these ecological offsets are still very complicated and have not yet been formulated by the German Emissions Trading Authority (DEHSt) at the German Environment Agency, which is responsible for the procedure in Germany.
In the current “Guideline for the preparation of applications for subsidies for indirect CO2 costs (electricity price compensation)” dated July 26, 2022, there is still a placeholder in the chapter for ecological offsets. A presentation by the German Emissions Trading Authority from July 27, 2022, only states that companies that have already introduced energy management systems or energy audits and have not identified any of the measures described above as necessary “do not have to provide any environmental offsets”.
With so many open questions, the effectiveness of the new funding directive is still unclear. Its original purpose was to protect against carbon leakage. By providing specific relief for electricity-intensive companies, competitive disadvantages of industries facing international competition due to carbon price-related surcharges are to be mitigated. The subsidies are an established element of EU emissions trading. But in the current energy price crisis, it becomes all the more important, which is why industry circles are eagerly awaiting it.
In response to a question from Europe.Table, the German Federal Ministry for Economic Affairs and Climate Protection (BMWK) emphasizes that in 2020 the German government advocated for even broader carbon leakage protection under the state aid rules. Among other things, the previous government had called for an improvement in the criteria for including (sub)sectors on the Commission’s list of eligible sectors, a spokeswoman says. It also advocated a review of electricity consumption efficiency benchmarks instead of a blanket benchmark reduction. This demand was not fully met by the Commission, the BMWK spokeswoman said.
Ajvar is a side dish consisting mainly of red peppers, chili and garlic, sometimes eggplant or tomatoes, and is popular in all Balkan countries. The recipe varies by region, as does its level of spiciness. And intensity, be it culinary or political, has been shown more than once by the Balkan region. This time, it is about the intensity of the effects of global warming in the region. And, like ajvar, it can be intense.
“Climate change impacts on agriculture and energy production have serious implications regionally,” a recent analysis by the International Military Council on Climate and Security (IMCCS) states. The document points out that agriculture in the Western Balkans accounts for 11 percent of total GDP, and hydropower provides 37 percent of total energy in the region.
The document reiterates that the Balkans is an “ethnically diverse geographic grouping of ten countries“: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Montenegro, Northern Macedonia, Romania, Serbia and Slovenia. Today, Bulgaria, Croatia, Romania and Slovenia are part of the European Union. And Ukraine’s new status as an EU candidate country, granted unanimously last June, has only fueled frustration among the Balkan countries that do not (yet) belong and keep knocking on the EU’s door.
“In a region where tensions [between neighbors] have never been eased, the situation will be further disrupted by climate change and the war in Ukraine, but also by rising food and energy prices. It will be difficult to keep markets and economies open, and we hear more and more voices calling for protectionism,” says Genady Kondarev, senior associate for Central and Eastern Europe at think tank E3G, speaking to Europe.Table.
He continued, “Like elsewhere in Europe, the Balkans are experiencing a hot and dry summer, which is affecting agricultural yields.” And even before the poor results became apparent, countries like Bulgaria wanted to restrict Ukrainian imports of cheap grain to protect their domestic market.
As a side effect, the impacts of global warming on the agricultural and energy sectors also affect the region’s security and political stability. For example, the IMCCS analysis stresses that increased climate change impacts could exacerbate existing post-conflict tensions, jeopardize Europe’s climate goals, and increase the region’s vulnerability to Chinese and Russian influence.
Genady Kondarev of E3G says: “Currently, Russia is exerting a serious and decisive influence in Serbia and Hungary. We have seen, for example, that Hungary, despite being part of the EU, receives gas from Russia under unclear conditions and has restricted its exports to the EU, which violates the rules of the European energy market and the call for solidarity.”
Bulgaria is the next country on the list. The previous government, which was pro-EU and pro-Western, barely lasted six months. Bulgaria is currently in a kind of state of emergency. “The country is traditionally pro-Russia,” Kondarev says. Under the previous government, Bulgaria tried to break away from Russian influence – not entirely voluntarily, in part, because Russia stopped gas supplies, although Bulgaria did not break the contract.
“Under the transitional government, there is a risk that the trend will reverse and Bulgaria will revert to a state of dependence on Russian energy carriers. It is becoming increasingly clear that Sofia is turning to Gazprom again for gas,” Kondarev says.
And IMCCS analysts drill deeper on the “ripple effect”: “Additionally, climate-induced migration flows from the Middle East and Africa through the region may stoke far right extremism. The outbreak of conflict in neighboring Ukraine only further heightens these concerns.” Italy sends its regards.
What does all this mean for the EU? Let the IMCCS have the closing word: “If the region does not feel supported by their European partners, it is possible that those promoting a new order will continue to mobilize support. If climate impacts on livelihoods, economic growth, and migration in the region remain unaddressed, discontent with the current system may grow, making violence along ethnic lines an even greater risk.”
Brussels’ political scene took its usual break in August. Drought and temperatures around 40 degrees Celsius may have reminded some people of the tasks ahead, even during the summer break. Next week, things will get back to business, with informal meetings of foreign and defense ministers on the agenda, among other things.
The Commission is stepping up the pace: Next year it intends to present a legislative proposal for a new electricity market design. It wants to take faster and more comprehensive action against high electricity prices than in the past. As Manuel Berkel has learned, a large-scale consultation is to begin this fall. At the end of March, EU heads of state and government urged Brussels to come up with a fundamental solution to high energy prices. Such a swift initiative with legislative character still comes as a surprise, as a new energy market design was previously regarded as a mammoth project that would take many years to complete.
The German industry eagerly awaited it: The Commission has approved the German government’s electricity price compensation scheme. Energy-intensive companies can be reimbursed a total of €27.5 billion in indirect emission costs for the years 2021 to 2030. But some questions remain unanswered, as Lukas Scheid analyzes. Since details of the compensation scheme are still lacking, experts find it difficult to classify the significance of the billion euro sum. Uncertainty is also caused by the ecological measures that Brussels is demanding in return for the electricity price compensation.
The European Commission wants to take faster and broader action against high electricity prices than previously known. A spokesperson for Energy Commissioner Kadri Simson announced concrete steps for a new electricity market design on Thursday in response to a question from Europe.Table: “We plan to launch a broad public consultation in the fall, based on an initial impact assessment setting out the main issues and objectives. This will allow us to present a legislative proposal next year.”
Such a quick initiative with legislative character comes as a surprise. Until now, a new energy market design was considered a mammoth project that would require years of preparation. However, high prices for gas and electricity have been burdening EU members at least since the start of the Russian war against Ukraine. At a meeting in Brussels at the end of March, the heads of state called on the Commission to draft a fundamental solution in addition to immediate measures.
In connection with the legislative initiative and the public consultation, the Commission spokesman yesterday referred to a statement Simson made at the extraordinary meeting of energy ministers in late July: “We are responding to the mandate of EU leaders to look at how our electricity market could function in a situation of extreme volatility and how we can maximize the benefits of renewables in the system.”
Extreme was once again the increase of electricity and gas prices yesterday. Electricity supplies for Germany next year rose by 16 percent to €781 per megawatt hour. Gas for September cracked the €300 mark and reached up to €323, 17 times the long-term average before the war.
Because electricity prices follow gas quotations, demands are growing louder to decouple electricity market design from the cost of the most expensive fuel. As reported by Europe.Table, the German Ministry of Economics, among others, is looking into whether the Spanish model of a gas price cap for power plants could be applied to the entire EU.
The Green-led Economics Ministry’s own parliamentary group in the Bundestag was skeptical about the idea. “Prices for gas and electricity urgently need to be lowered. The solution, however, is not an unaffordable subsidy with taxpayers’ money, but a joint European procurement that puts an end to the current unrealistic prices on the global markets,” said energy policy spokeswoman Ingrid Nestle yesterday.
” Here, joint efforts to reduce the consumption of gas, electricity and the like are the key to bringing global market prices back down to a tolerable level. High demand leads to high prices,” said the Green politician.
The FDP, on the other hand, pointed to the substitution of gas as an energy source. “An electricity price cap at EU level is not the right remedy,” said the Liberals’ economic policy spokesman Reinhard Houben. “We should not use the little gas that is available to us to generate electricity. In mid-July, the German government therefore decided to bring coal-fired power plants back online. It is also considering extending the operating lives of Germany’s remaining three nuclear power plants.”
The change to the market design sought by the Commission meets with approval in the CDU/CSU. “Only a market-based reform is effective, meaning changes to the mechanisms of price setting,” said Markus Pieper (CDU), a member of the European Parliament. He is convinced that pricing must take the specific situations of renewables and fossil fuels into account to a greater extent.
His CSU colleague Angelika Niebler is more explicit: “The reform of the EU internal energy market must be driven forward more consistently. For example, by decoupling pricing for renewables and fossil fuels or revising the market design.” Niebler also believes the marginal cost principle is in need of reform.
Separate electricity markets for renewable and fossil power plants would be a fundamental innovation. However, not only the CDU/CSU is concerned about the current windfall profits from green power plants. The Commission, too, urged that no distinction should be made between the energy sources when it comes to excess profits. Pieper firmly expects that there will be a new energy market design in the EU as early as 2024. Niebler would like to see more proactive action by the German government to reach a consensus between the member states.
Among the short-term crisis measures, there is broad support for price caps if they apply to households’ basic consumption rather than to power plants. The CDU/CSU party leadership already proposed that the government should guarantee low-cost basic gas and electricity. Pieper yesterday added that he would like to limit this measure to two years, until the new market design takes effect.
Green Party parliamentarian Michael Bloss has the same idea, but wants to finance the measure differently: “If it stays cold in our living rooms in winter, Europe will face an existential crisis. To prevent this, we need to discuss a price cap for basic energy needs for everyone in Europe. This must be paid for by the energy suppliers. A gas price cap cannot result in the government financing the billions in excess profits of fossil fuel companies.”
Cornelia Ernst, a member of the Left Party, would prefer to make the measure permanent: “A price cap makes sense to me as a first step and in the short term. However, it must be combined with an excess profits tax. In my opinion, person or household long-term quotas at social prices must be introduced. Those who wish to consume above-average amounts should then be charged accordingly.”
The European carbon price recently rose again to just below €100. Although energy-intensive industries do not have to pay this price for the most part, as they receive free emission allowances, indirect emission costs do have an impact on companies. These are the costs for electricity that they purchase externally and for which the energy suppliers have to pay the carbon price surcharge during generation.
In the face of rising electricity and carbon prices, the fact that the EU Commission approved the German government’s new electricity price compensation scheme last week is a welcome development for the industry (Europe.Table reported). Energy-intensive companies will be able to receive a reimbursement totaling €27.5 billion in indirect emission costs for the years 2021 to 2030.
The approval had long been eagerly awaited in industry circles, says Joachim Hein, energy and climate policy officer at the Federation of German Industries (BDI). Other EU countries were much faster in implementing the new state aid guidelines, which is why the BDI repeatedly urged Berlin and Brussels to hurry. For the industry, this marks the end of a transitional phase of uncertainty. Companies now have until the end of September to apply for electricity price compensation for the past year. Until now, this had not been clear, said Hein.
However, this does not mean that everything has been clarified yet, because the details of the national funding guidelines are still open and will not be announced until they are published in the German Federal Gazette. The sum of €27.5 billion can thus not yet be classified, says Hein. It is not clear how the carbon price in the European Emissions Trading System (ETS) and fuel prices will develop, especially in light of the ongoing war, he adds. “These factors, in particular, have a very significant impact on electricity-intensive industries,” says Hein.
The ongoing uncertainties are also caused by the new quid pro quos that companies have to provide in return for electricity price compensation. Brussels imposed certain climate protection conditions on eligible companies when it revised the state aid guidelines in September 2020.
In detail: Companies must conduct an energy audit or introduce an energy management system and implement its results, provided that the payback period for the necessary investments does not exceed three years. Alternatively, they can invest at least 50 percent of the aid in decarbonization or energy efficiency measures or ensure that at least 30 percent of their electricity demand is met from renewable sources.
However, the BDI believes that these ecological offsets are still very complicated and have not yet been formulated by the German Emissions Trading Authority (DEHSt) at the German Environment Agency, which is responsible for the procedure in Germany.
In the current “Guideline for the preparation of applications for subsidies for indirect CO2 costs (electricity price compensation)” dated July 26, 2022, there is still a placeholder in the chapter for ecological offsets. A presentation by the German Emissions Trading Authority from July 27, 2022, only states that companies that have already introduced energy management systems or energy audits and have not identified any of the measures described above as necessary “do not have to provide any environmental offsets”.
With so many open questions, the effectiveness of the new funding directive is still unclear. Its original purpose was to protect against carbon leakage. By providing specific relief for electricity-intensive companies, competitive disadvantages of industries facing international competition due to carbon price-related surcharges are to be mitigated. The subsidies are an established element of EU emissions trading. But in the current energy price crisis, it becomes all the more important, which is why industry circles are eagerly awaiting it.
In response to a question from Europe.Table, the German Federal Ministry for Economic Affairs and Climate Protection (BMWK) emphasizes that in 2020 the German government advocated for even broader carbon leakage protection under the state aid rules. Among other things, the previous government had called for an improvement in the criteria for including (sub)sectors on the Commission’s list of eligible sectors, a spokeswoman says. It also advocated a review of electricity consumption efficiency benchmarks instead of a blanket benchmark reduction. This demand was not fully met by the Commission, the BMWK spokeswoman said.
Ajvar is a side dish consisting mainly of red peppers, chili and garlic, sometimes eggplant or tomatoes, and is popular in all Balkan countries. The recipe varies by region, as does its level of spiciness. And intensity, be it culinary or political, has been shown more than once by the Balkan region. This time, it is about the intensity of the effects of global warming in the region. And, like ajvar, it can be intense.
“Climate change impacts on agriculture and energy production have serious implications regionally,” a recent analysis by the International Military Council on Climate and Security (IMCCS) states. The document points out that agriculture in the Western Balkans accounts for 11 percent of total GDP, and hydropower provides 37 percent of total energy in the region.
The document reiterates that the Balkans is an “ethnically diverse geographic grouping of ten countries“: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Montenegro, Northern Macedonia, Romania, Serbia and Slovenia. Today, Bulgaria, Croatia, Romania and Slovenia are part of the European Union. And Ukraine’s new status as an EU candidate country, granted unanimously last June, has only fueled frustration among the Balkan countries that do not (yet) belong and keep knocking on the EU’s door.
“In a region where tensions [between neighbors] have never been eased, the situation will be further disrupted by climate change and the war in Ukraine, but also by rising food and energy prices. It will be difficult to keep markets and economies open, and we hear more and more voices calling for protectionism,” says Genady Kondarev, senior associate for Central and Eastern Europe at think tank E3G, speaking to Europe.Table.
He continued, “Like elsewhere in Europe, the Balkans are experiencing a hot and dry summer, which is affecting agricultural yields.” And even before the poor results became apparent, countries like Bulgaria wanted to restrict Ukrainian imports of cheap grain to protect their domestic market.
As a side effect, the impacts of global warming on the agricultural and energy sectors also affect the region’s security and political stability. For example, the IMCCS analysis stresses that increased climate change impacts could exacerbate existing post-conflict tensions, jeopardize Europe’s climate goals, and increase the region’s vulnerability to Chinese and Russian influence.
Genady Kondarev of E3G says: “Currently, Russia is exerting a serious and decisive influence in Serbia and Hungary. We have seen, for example, that Hungary, despite being part of the EU, receives gas from Russia under unclear conditions and has restricted its exports to the EU, which violates the rules of the European energy market and the call for solidarity.”
Bulgaria is the next country on the list. The previous government, which was pro-EU and pro-Western, barely lasted six months. Bulgaria is currently in a kind of state of emergency. “The country is traditionally pro-Russia,” Kondarev says. Under the previous government, Bulgaria tried to break away from Russian influence – not entirely voluntarily, in part, because Russia stopped gas supplies, although Bulgaria did not break the contract.
“Under the transitional government, there is a risk that the trend will reverse and Bulgaria will revert to a state of dependence on Russian energy carriers. It is becoming increasingly clear that Sofia is turning to Gazprom again for gas,” Kondarev says.
And IMCCS analysts drill deeper on the “ripple effect”: “Additionally, climate-induced migration flows from the Middle East and Africa through the region may stoke far right extremism. The outbreak of conflict in neighboring Ukraine only further heightens these concerns.” Italy sends its regards.
What does all this mean for the EU? Let the IMCCS have the closing word: “If the region does not feel supported by their European partners, it is possible that those promoting a new order will continue to mobilize support. If climate impacts on livelihoods, economic growth, and migration in the region remain unaddressed, discontent with the current system may grow, making violence along ethnic lines an even greater risk.”
