After a decade of very low inflation, inflation is hitting its highest level in the last 25 years, with an annual inflation rate within the 27 EU countries of 9.8 percent in July.
Energy prices are at a record high and remain extremely volatile. Before the invasion of Ukraine, wholesale gas prices were around 200% higher than the year before, and today benchmark gas prices are trading around EUR 250 per MWh and peaked at above EUR 340 per MWh in July, more than ten times higher than a year ago. While Russian pipeline gas accounted for 40% of the gas imports to the EU last year, it now represents only 9%.

Wholesale electricity prices have followed a similar trend, climbing up to EUR 1000 per MWh. These high prices were also fueled by a strong global demand for gas in the post COVID-19 economic recovery.

This unprecedent situation is forcing the EU and its Member States to observe the inadequacy of some regulations and to take unprecedent measures to contain the price pressure on households and companies.

On September 14, 2022, Ursula von der Leyen presented in her State of the Union speech, the EU Commission proposals to tackle these dramatic price increases.

These measures can be split into three main categories:

1) Reducing the overall electricity consumption

- Reducing the electricity demand during peak hours:

  • An obligation to reduce electricity consumption by at least 5% during elected peak hours: the member states will be required to identify the 10% of hours within the highest expected price and reduce demand during these peak hours.

- Reducing overall electricity demand by at least 10% until March 31, 2023.

2) Temporary ‘Inframarginal’ electricity revenue capping at EUR 180/MWh

- These measures apply to renewables, nuclear and lignite, which are providing electricity to the grid at a cost below the price level set by the most expensive marginal producers.

- Revenues above the set cap will be collected by Member States and used to help energy consumers reduce their bills.

- Member States trading electricity are encouraged to initiate bilateral agreements to share part of the inframarginal revenues for the benefit of end users in the Member States with low electricity distribution.

3) Solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors

- Profits impacted are those generated in 2022 above a 20% increase on the average profits of the previous three years.

- More than 140 billion euros are expected to be collected by Member States and will be redirected to energy consumers, in particular vulnerable households, hard-hit companies and energy-intensive industries. They will also be used to promote investments in renewables and energy efficiencies.

In addition to these short term measures which will have a direct effect on the energy bills, the EU has also announced longer term measures:

- A deep and comprehensive reform of the electricity market especially to decouple the dominant influence of gas on the price of electricity.

- The temporary modification of the state aid framework to allow the provision of state guarantees to help companies facing severe liquidity problems in the electricity futures markets. 

- The modification of the currently used in the gas market, the Title Transfer Facility -TTF- to take into account the current gas market increasing quantities of liquefied natural gas.

- The creation of an hydrogen bank, to reach the ambition to produce 10 million tons of green hydrogen by year by 2030. This bank will guarantee the purchase of hydrogen with an investment of EUR 3 billion to build the future hydrogen market.

Next step: follow-up on September 30, 2022, when the Energy ministers will discuss these proposals.

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