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Brussels mulls price cap on renewables and nuclear power to curb bills

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The European Union could set a maximum price on the electricity generated by non-gas producers, namely renewables and nuclear, with the aim to raise extra revenue and bring down soaring power bills, according to draft plans circulated by the European Commission.

The measure should be accompanied by an EU-wide plan to cut down electricity demand, similar to the 15% gas reduction plan agreed before the summer break.

The ideas, contained in a leaked non-paper seen by Reuters and other media outlets, do not constitute an official policy announcement and are set to be discussed by EU energy ministers when they gather next Friday for an emergency meeting.

The Commission believes both the price cap and the consumption demand plans could be rapidly implemented to offer instant relief across the economy, although it is unclear how much.

The leak comes just days after European Commission President Ursula von der Leyen pitched an “emergency intervention” in the electricity market to tame the spiralling prices that are putting households and companies under extreme financial stress.

She also spoke of a “structural reform” but in the longer term.

The Commission chief is scheduled to deliver her annual State of the Union address on 14 September, when she is expected to unveil further details on solutions to tackle the worsening energy crisis.

“The skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design,” von der Leyen said on Monday.

“[The market] was developed under completely different circumstances and for completely different purposes. It is no longer fit for purpose.”

Marginal pricing under scrutiny

In her public statement, von der Leyen appeared to refer to the model of marginal pricing that currently governs the liberalised electricity market.

Under this system, all electricity producers – from wind and solar to fossil fuels – bid into the market and offer power according to their production costs. The bidding starts from the cheapest sources – the renewables – and finishes with the most expensive ones – in this case, gas.

Since most EU countries still rely on gas to meet all their power demands, the final price of electricity is often set by gas, even if clean, cheaper sources also contribute to the total supply.

The system was initially praised for boosting transparency and promoting the switch to green energy, but Russia’s invasion of Ukraine has created unprecedented instability.

The continued supply manipulation by Gazprom, Russia’s state-controlled energy giant, has put investors on edge, leading to rampant speculation and record-breaking prices.

“We need a new market model for electricity that really functions and brings us back into balance,” von der Leyen said.

The document drafted by her executive rejects more drastic ideas, such as a far-reaching cap on all electricity, subsidies for carbon emissions permits or an outright suspension of the wholesale market.

Instead, it suggests a more targeted cap for non-gas producers – wind, solar, hydro and nuclear power – who have seen a surge in profits under the market design determined by gas.

The difference between the final electricity price and the agreed-upon cap would constitute a source of extra revenues for governments. The funds could then be turned into direct income support for the worst-hit households and companies.

This price cap would not be compatible with the windfall taxes on energy firms that countries like Spain and Italy have introduced in recent months, the Commission warns, because these exceptional measures are broader in scope.

The executive also dismisses the possibility of applying the Iberian model – a subsidised cap on gas prices – to the entire EU market, fearing it would incentivise a higher consumption of gas across the bloc.

Most experts insist that marginal pricing continues to be the best market model in normal times and any intervention should be precise and time-limited. Energy savings, they say, remain the best tool for the EU to make it safely through the winter season.

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