EU Proposes Caps on Power Prices and Consumption to Ride Out Winter Energy Crisis

Europe stepped up its preparations for a winter without Russian energy supplies on Wednesday, proposing price caps and demand suppression for electricity, along with a price cap on imports of Russian natural gas.

Speaking two days ahead of a meeting of EU energy ministers, European Commission President Ursula von der Leyen laid out five proposals to address the looming crisis.

The proposals, which will need the approval of the EU’s member states to take effect are:

1. A mandatory target for cutting electricity demand at peak hours, which typically generate the highest prices.

2. A cap on revenues for non-fossil fuel power generators, restricting the scope of renewable generators and hydropower companies to make excess profits as ‘price-takers’ on a wholesale market where reference prices are usually set by the price of gas-powered electricity.

3. A “solidarity contribution” (in other words, windfall taxes) levied on the excess profits of fossil fuel companies.

4. Liquidity support for participants in the bloc’s power markets, who have been hit with a massive rise in collateral requirements as the price of their future buying commitments has exploded. This will include a temporary relaxation of the EU’s state aid rules.

5. A cap on the price of natural gas imports from Russia.

“The objective here is very clear,” von der Leyen said. “We must cut Russia’s revenues which Putin uses to finance this atrocious war against Ukraine.”

The measures represent another escalation in the ‘energy war’ between Russia and Europe that was triggered by Russia’s invasion of Ukraine in February. They come only days after G-7 ministers agreed to impose a price cap on Russian oil exports, trusting to western dominance of maritime insurance markets to enforce it. Russia had suspended all shipments of natural gas to Germany through the Nord Stream pipeline as a result, raising the likelihood that Europe will have to get through the coming winter without any supplies of Russian gas.

Russian President Vladimir Putin raised the stakes again earlier on Wednesday, telling a conference in Vladivostok in Russia’s Far East that the country would not supply any fuel of any sort to Europe if it tried to impose a price cap on its gas exports.

“Will there be any political decisions that contradict the contracts? Yes, we just won’t fulfil them. We will not supply anything at all if it contradicts our interests,” Reuters quoted Putin as saying. “We will not supply gas, oil, coal, heating oil – we will not supply anything.”

Europe usually imports about 40% of its gas and 30% of its oil from Russia.

Von der Leyen noted that the small amounts of Russian gas still reaching the EU, chiefly through the Yamal-Europe pipeline, represent only 9% of current imports. The bloc has also made better progress than first seemed likely in filling its storage facilities ahead of the peak winter demand season. According to data from Gas Infrastructure Europe, they are now 82% full, having reached the Commission’s 80% target almost two months ahead of schedule.