Von der Leyen’s energy crisis prescription: Less Russia, more meddling

Business as usual could soon be dead for EU energy markets, as the bloc tries to bring spiraling energy prices under control.

Russian President Vladimir Putin’s invasion of Ukraine has unleashed a “war on our energy, a war on our economy, a war on our values and a war on our future,” Commission President Ursula von der Leyen said Wednesday in her annual State of the European Union speech.

She called for ending any remaining dependence on Russian energy while dramatically revamping how the EU’s energy markets function and pouring in €140 billion to help people and businesses deal with high energy bills.

The blame for the crisis largely lies with the Kremlin, she said.

“Russia keeps on actively manipulating our energy market,” von der Leyen told the European Parliament in Strasbourg, labeling Russia an “unreliable” energy supplier.

Hours after her speech, the Commission unveiled its proposals to cut electricity demand, claw back profits from utilities and fossil fuel companies, and help consumers and businesses.

Brussels also said it is preparing to go further by making changes to how the bloc’s gas and electricity markets work, from pricing formulas to automatic freezes on trades during emergency panics.

“The situation is unprecedented and so our proposals to tackle it should also be unprecedented,” said Commission Executive Vice President Frans Timmerman, speaking at the press conference where the full measures were unveiled.

That means big changes are coming to the bloc’s energy markets.

Power markets

Von der Leyen’s call for deep reforms is a startling shift for the Commission.

As recently as May, the Commission called the bloc’s electricity market “well-functioning.”

Countries like Spain and France, though, had long been calling for changes, slamming the current system’s so-called merit order, under which the electricity price is set by the last and most expensive input — usually natural gas. That means if gas becomes expensive, it raises all electricity prices, even those generated by much cheaper renewables.

The worry in Brussels was that tinkering with the structure could undermine future investments in renewables and endanger the EU’s Green Deal goals.

But now, under pressure from national energy ministers who last week called for market reform “as soon as possible,” the Commission chief accepts that the system has to change — and fast.

“The current electricity market … is not fit for purpose anymore,” von der Leyen said. “We have to decouple the dominant influence of gas on the price of electricity” and start on a  “deep and comprehensive” reform.

Countries will have a “concrete proposal on the table” to reform power markets in “the early months of next year,” Timmermans added.

Other changes will kick in sooner.

The Commission wants countries to start cutting electricity demand by 5 percent at peak times each month, and trim overall monthly power use by 10 percent. This would “reduce gas use for power by around 4 percent over the winter,” due to the close connection between power and gas prices.

A second measure would cap the revenues of non-gas power producers at €180 per megawatt-hour. On top of that, Brussels wants to impose a 33 percent levy on fossil fuel company earnings exceeding 20 percent of their average profits for the past three years.

All of that would raise an estimated €140 billion to cushion the blow for energy users.

The Commission also asked the bloc’s securities and banking regulators to come up with solutions to a liquidity crisis facing energy providers, as they are grappling with extraordinarily high requests for cash guarantees to cover insurance contracts for trades on the wholesale market.

The European Securities and Markets Authority has to suggest alternative forms of collateral utilities could use — although the European Central Bank has worries about such a liberalization — as well as figuring out why trading circuit breakers haven’t kicked in on energy exchanges despite soaring prices.

Gas markets

On gas, von der Leyen highlighted the need for a new reference gas price that reflects the true import cost of seaborne liquefied natural gas, stripped of any price spikes caused by supply interruptions via pipelines from Russia.

“This is very complex and not at all trivial,” the Commission president said.

The Commission is working on an alternative price reference for the gas market to supplant the industry standard, the Netherlands-based TTF trading hub.

“Our gas markets have changed dramatically,” said von der Leyen. “But the benchmark used in the gas market — the so-called TTF — has not adapted.”

But getting a new benchmark up and running could take from six months to a year, and so is unlikely to have an impact on this year’s heating season, said Máximo Miccinilli, head of energy and climate at the FleishmanHillard consultancy.

“I think it’s visible and needed, but it might take much more time than just before the winter,” he said.

The Commission said it had yet to decide which EU entity would start collecting gas price import data from all companies, as a first step toward setting up the new benchmark.

Von der Leyen also backtracked on an idea that had been a big part of proposals she announced last week: setting a price cap on imports of Russian gas, which she said would hamper the Kremlin’s ability to finance the war in Ukraine.

EU energy ministers balked at that idea during their summit on Friday, with most instead calling for limiting the price of all gas imports.

In Wednesday’s speech, von der Leyen said she was discussing a “task force” with Norway — overtaking Russia as the bloc’s biggest gas supplier this year — to look at “how are we able to lower, in a reasonable manner, the price of gas.”

Simone Tagliapietra, a senior analyst at the Bruegel think tank, said setting up this task force could take “a matter of weeks,” and he added the Commission could soon approach the U.S. with a similar proposal.

Getting suppliers on board before winter is another story.

Norwegian Prime Minister Jonas Gahr Støre has repeatedly said he would not back a price cap on gas exports.

Green energy

The long-term answer to the EU’s energy problems and to its effort to combat climate change is shifting to renewables and hydrogen, von der Leyen said.

The bloc’s REPowerEU program already aims to produce 10 million tons of green hydrogen — made with renewable energy — by 2030.

But “we need to move from a niche to a mass market for hydrogen,” she said in French.

That involves creating a “hydrogen bank” financed by €3 billion from the bloc’s Innovation Fund to buy up supplies before a real market gets off the ground.