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EU response to high energy prices raises hopes for natural gas, nuclear

28 October 2021 Cristina Brooks

EU member states this week debated the right steps to fend off further natural gas and electricity price surges as the bloc pursues carbon neutrality.

High gas prices propelled a nearly 200% rise in wholesale electricity prices between 2019 and October 2021, the European Commission (EC) said in a communication to members of the European Parliament on 13 October.

Energy commissioner Kadri Simson suggested states use the EC's "toolbox" of short-term policy options.

The toolbox contains existing policy options meant to prevent energy poverty among citizens and small businesses. For example, it includes energy price caps, and temporary tax breaks for consumers financed by the revenue from state auctions of EU emissions trading system (ETS) allowances.

All-in-all, the toolbox has served 19 governments that are intending to or have already used the policies.

But a long-term solution to price surges remains elusive. On 22 October in Brussels, EU member state executives addressed the recent price spike in what was called a "heated debate," disagreeing on the assessment of the current situation and the correct long-term response.

Energy ministers continued the debate at an extraordinary meeting of the Transport, Telecommunications and Energy (TTE) Council on 26 October, but did not find a path forward.

One proposal by Spain and France is that the EU should buy gas collectively. Gas "still plays an important role in the EU energy mix" and just over half of it is consumed for heating and cooling of buildings, according to the communication.

But an EU-led intervention in gas markets will have to wait until November and December, when the EC plans revisions of gas storage and security policies.

EU states band together on gas supply

While the EC suggested in the communication that gas demand this coming winter would be met in the same manner as last winter, the level of gas storage available is currently tight and the weather would be a "key variable."

Half the EU states are legally obliged to have gas reserves, but half are not, so the EC is looking for "a more integrated European approach" on gas storage to prevent price volatility.

Simson said the EC would revise the EU's 2017 gas security of supply regulation in December. At the same time, it will look for ways that states can jointly procure gas reserves as Spain suggested.

That same month, it is set to propose a "gas regulatory framework" that would aim to decarbonize the gas market, for example with hydrogen, although it didn't say whether this would be included under the revision of gas supply legislation.

But the EC won't wait to act until December. It plans to set up new cross-border regional groups that will analyze supply risks and advise on them, especially for regions with unusually low storage.

The groups will also look into the potential for regional gas storage agreements and storage auctions.

The EC urged member states to set up rules that let them bail out energy suppliers facing both rising wholesale electricity and gas costs and limits on what they can charge consumers. In the UK, several energy suppliers dealing with the issue have collapsed under the financial strain.

The EC's communication suggested conserving electricity supplies through energy efficiency and demand response, and deploying battery storage, hydrogen, and trans-European electric networks.

The EU executive is also negotiating with gas-producing and -consuming countries to ensure market liquidity, ahead of presenting an international engagement strategy that is focused on the energy transition in early 2022.

"The current, unexpected price rise is casting a light on some unknowns in the clean energy transition underway at a global level," it said in the communication.

Nuclear, gas, and hydrogen possible solutions

The energy crisis appears to be influencing the way the EU finances nuclear power and gas infrastructure.

The EC mulled excluding both from the EU's net-zero-aligned finance act, colloquially known as the Green Taxonomy, set to enter into force on 1 January and decide the place of nuclear and gas in future subsidies and the private green finance world.

A decision will be made in a complementary Delegated Act later in 2021.

But following the energy price crisis, the EC started to mull "proposing legislation to support the financing" of GHG-cutting, gas sector activity that is not included in the taxonomy. It also identified power-to-X, or the use of electricity to make e-fuels like hydrogen and ammonia, as a long-term energy storage option.

"In the next few weeks, we will discuss nuclear energy and the taxonomy as regards natural gas in the EU. If we wish to achieve climate goals, then we have to ensure technology neutrality," said Simson.

Pressure is ramping up over the taxonomy's inclusion of nuclear power, about which member states had an "intense debate." The current holder of the rotating Presidency of the Council of the EU, Slovenian minister Jernej Vrtovec, said that many member states saw nuclear as a climate-friendly solution as well as a means to reach energy independence.

Simson said that the EC's scientific advisory body, the Joint Research Centre, had warned of the dangers of producing nuclear waste, but said nuclear was "consistently acknowledged as a low-carbon energy source," and this was the reason why commissioners were carefully analyzing its inclusion in the taxonomy.

EU electricity, gas, carbon markets get checkup

Prime Minister of Spain Pedro Sánchez called for an analysis of energy price formation and a study of the functioning of the gas, electricity, and EU ETS markets.

Consequently, Simson asked for a report on the functioning of the EU's energy markets from the agency overseeing wholesale energy markets, the European Union Agency for the Cooperation of Energy Regulators (ACER). The agency should come up with early findings by mid-November ahead of a full report in April.

ACER will also investigate any evidence of "misbehavior" in gas and carbon markets.

Despite this, "there is no evidence in recent [carbon] market information [that] speculation is a major driver of price in the carbon market, but we have asked them to target actions," Simson said. The impact of the gas price increase on the electricity price is nine times bigger than the effect of the EU ETS carbon price increase, the EC stated.

Simson also said she is looking for a way to restructure gas markets so that gas can continue to be used as flexible energy source while avoiding price volatility in the future, but she does not expect a revamp of electricity markets. "When it comes to the drivers of the price hike, it has been caused by the extraordinary global gas demand, not our market design," said Simson.

Threat to renewable energy transition

The EU's greening targets should not be left behind in its need to address the current energy crisis, Vrtovec said. Member states should inform citizens about why energy price rises occur and reaffirm the Green Deal, the EU's net-zero pledge currently being enacted by the Fit for 55 legislative package now being discussed in the parliament and council.

Hungarian Prime Minister Viktor Orban has blamed the electricity price crunch on the future enactment of the Fit for 55 legislation.

But the EC is not backing down. It is looking to ensure that whatever form the market takes, renewable energy remains key. "We all agree the only solution to price volatility is more renewable energy," said Simson.

Green group European Environmental Bureau agreed in an open letter ahead of the TTE meeting noting that "the current energy prices emergency in Europe is a wake-up call for more climate action, not less" and suggested transitioning to a 100%-renewable electricity supply.

In 2020, renewables overtook fossil fuels as the EU's largest power source (providing 38%, while fossil fuels provide 37%, and nuclear 25%), according to the EC's recent State of the Energy Union Report.

The share of renewable energy sources in the overall energy mix, which includes both power and fuel, was estimated to reach 22%, although some EU member states missed targets obliged by the EU's Renewable Energy Directive.

But the EU's "net energy import dependency" increased to 60.6% in 2019 compared with 56% in 2000, which was the highest level in the past three decades, the report found.

The EC is working with member states on ways to boost renewable generation, for example through increased uptake of renewable-energy-financing power purchase agreements (PPAs) by smaller companies or by aggregating demand. It has proposed de-risking PPAs through the InvestEU financing program, which draws upon the EU Budget for the next six years.

It also wants to speed up permitting and cut the red tape that remains a barrier to renewables, delaying projects for up to six or seven years; suggestions have been made that the permitting process should be completed in two years. The EC plans to issue a document on permitting best practices next year.

Posted 28 October 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability


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