Susanna Twidale and Kate Abnett

BRUSSELS/LONDON – The EU Summit this week faces difficulties in responding to the record price of oil and gas prices triggered by Russia’s invasion.

Each member state of the EU is responsible for developing their national energy policy. The task of the European Commission to develop a plan for balancing the goals of decreasing dependence on Russian oil, economic pain, and not losing sight its ambitions of cutting carbon emissions is complicated by this.

After a series of initial proposals made in October, when prices were rising rapidly, the EU executive has begun to draft additional options that it will present to EU leaders during a summit in Brussels on March 24-25.

It is expected that they will contain measures countries can take to implement national policies when coordinated intervention causes divisions.

EU-wide regulation of gas prices would be opposed by those who believe it would subsidise the production of fossil fuels. This money should, according to them, be invested in the transition to renewable energy.

According to supporters, it is necessary to ensure that member states have the funds to support domestic efforts to help poor households in case of high energy costs. EU governments already have spent billions on tax cuts, subsidies and consumer protection.

Last week, Spain and Portugal announced that they have developed proposals for imposing a price cap of 180 euro per megawatt hour in Europe’s wholesale electricity spot markets. They also said that the plans would be pursued even without EU support.

A source in the Spanish Energy Ministry stated that Monday’s cap was not the core proposal of the country and Spain would prefer to have greater EU support.

The source stated that “it is not the main option at the moment.” “The primary option is to remove the gas price from the electric price.”

Some countries have already implemented price caps. France for instance, which has frozen gas prices in its country last year and paid compensation to gas companies that sold below spot prices, is one of these.

Greece proposes a separate cap on European gas prices. The main reason for the high cost of electricity is that they are too expensive.

Germany and the Netherlands are opposed to any intervention in the energy market and proposed price caps.

Rob Jetten, Dutch climate minister said that he was reluctant to make any intervention in markets as it could disrupt investments in sustainable energies.

Leonhard Birnbaum is the chief executive officer of E.ON Germany, Germany’s largest oil company. He also stated last week there was a danger that artificially cap prices will mask the scarcity signals which motivate producers to boost energy production when demand rises.

Variable costs

Although electricity prices are set by all European countries is a common system, wholesale costs can vary among member states based on energy mix, weather, and grid connections.

On Monday, the Spanish baseload day-ahead electricity contract traded at 175 Euros per megawatt hour (MWh), while its German counterpart was around 237 EUR/MWh.

The price of the electricity is determined by how much it costs to deliver the power needed to satisfy demand. Spain says that this practice does not accurately reflect the increasing share of renewable power.

As it waits for a report from EU energy regulators about possible EU electricity market reforms, Brussels is resisted the calls to separate electricity and gas prices. Spain had proposed this idea late last year.

Leonore Gewessler, Austria’s climate minister said that it was foolish to take action before these findings were known.

She stated that “all possible changes to the energy market must be carefully considered.”

Russia’s February 24 invasion of Ukraine has exacerbated the cost rise. The EU was forced to rush to draft plans to reduce dependence on Russia which supplies 40% of its gas.

This month, the EU set out a plan for reducing dependence on Russian gas by 2/3 this year. Analysts believe this will prove difficult given EU’s focus on competing to supply scarce LNG. It would be necessary to accelerate the expansion of renewable energy projects as well as energy-saving renovations.

This week, the Commission will propose EU-wide regulations requiring all EU countries to have gas stored ahead of winter in order to protect against shocks to supply. Reuters has seen a draft of summit conclusions. It was agreed that the proposal would be “taken forward”.