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Energy

EU energy prices

EU response to the surge in energy prices and implementation of the REPowerEU plan.

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In the EU, each EU country determines its own energy mix, in respect of the rules of the internal EU energy market and taking into consideration the EU’s climate ambitions. The primary objective of a well-functioning market is to foster a secure supply of energy produced as sustainably as possible and at affordable prices.

EU action and measures

In the second half of 2021, the EU saw a significant increase in wholesale energy prices. Amongst the underlying reasons, the main driver was the surge in global energy demand, notably in Asia, as most countries emerged from the Covid-19 pandemic. This led to tighter supply, resulting, for instance, in lower volumes of liquefied natural gas imports to Europe.

At the same stage, a combination of lower supplies of gas, a longer heating season in 2020-21 and unfavourable weather conditions to produce renewable energy contributed to further strains. To a lesser extent, an increased carbon price under the Emissions Trading System (ETS) also contributed to the adverse market situation.

Toolbox of measures

The spike in wholesale prices brought concerns about its effect on end-users, in particular to the most vulnerable consumers. To clarify what measures are possible under existing EU rules, on 13 October 2021 the Commission published the Communication 'Tackling rising energy prices: a toolbox for action and support' on 13 October 2021. It documents a range of short- and medium term initiatives that EU countries can take under the existing legislative framework, and other potential responses within the Commission’s remit. 

REPowerEU

As an immediate reaction to the Russian invasion of Ukraine on 24 February 2022, which amplified the on-going strain on the energy markets, the Commission published on 8 March the Communication 'REPowerEU: Joint EU action for more affordable, secure and sustainable energy'. It states the EU’s intention to phase out its dependency on Russian fossil fuels, outlining a series of measures to deliver on this ambition, some of which complement the 2021 toolbox on energy prices and look at the EU's security of supply.

On 18 May 2022, the REPowerEU plan was published, presenting a detailed and comprehensive set of actions and resources to meet the goals outlined in the March communication. Its measures and proposals aim to further reduce the EU's dependence on Russial fossil fuels, while increasing the resilience of the EU's energy system. Building on the European Green Deal proposals, the REPowerEU plan puts forward an additional set of actions to save energy, diversify supplies and replace fossil fuels by accelerating the roll-out of renewable energy. Increasing energy savings and efficiency and scaling up renewables are expected to alleviate the pressure on energy prices while boosting the green transition in the EU.

The website REPowerEU: affordable, secure and sustainable energy for Europe explains the Plan and its actions.

Security of supply and affordable energy prices

Shortly after publishing the REPowerEU communication, EU leaders adopted the Versailles declaration. It covers Russia's aggression against Ukraine and underlines how the EU can reduce its dependence on Russian energy imports and build a more robust energy system.

On 23 March, the Commission published the Communication 'Security of supply and affordable energy prices: Options for immediate measures and preparing for next winter'. It sets out ideas for collective European actions to address the causes of the problem in the gas market and ensure security of gas supply at reasonable prices for citizens and businesses, notably by restocking gas storage facilities.

Playing my part

Together with the International Energy Agency (IEA), the Commission has published a series of actions that citizens can take to reduce their energy use, save money and at the same time support Ukraine by reducing the EU's dependence on Russian fossil fuels. The Playing my part report suggests 9 individual actions, that, if implemented by many, can make a difference.

Energy efficiency’s role for energy prices

Energy efficiency aims at a progressive reduction of energy consumption across all sectors, and is a necessary pre-condition to the clean energy transition. Especially in the context of high energy prices, energy efficiency measures and investments have an important role to play in

  • strengthening the resilience of the EU energy market
  • mitigating the macro-economic and social impacts of high energy prices, notably risking to drag many households into energy poverty
  • reducing the energy consumption and minimise our dependence on energy imports

Investing in energy efficiency is the most cost-effective way to save energy and reduce energy bills for public authorities, citizens and businesses. The REPowerEU plan proposes to raise the ambition of the Commission’s 2021 proposal for the EU energy efficiency target to ensure a 13% (rather than 9%) reduction of energy consumption by 2030, compared to the 2020 reference scenario projections. REPowerEU also includes an energy savings plan aiming to reduce overall energy consumption.

Progressing in the uptake of both energy efficiency measures and related investments is important, as medium to long-term measures will contribute to reducing energy prices, provide affordable and clean energy to households and companies and overall increase the resilience of the EU’s energy system and the internal energy market.

EU countries have currently planned a number of such actions, as part of their Recovery and Resilience Plans. The need to accelerate energy efficiency investments is not only key to mitigate the impacts of high energy prices, but it is also economically beneficial to take advantage of the reduced payback time for energy efficiency and building renovation investments. Many local commercial banks across the EU offer energy efficiency mortgages and financial lending products with lower credit risk and interest rates.

Energy pricing models

As in other sectors, the EU electricity market has a number of different players in the supply chain – from producers (or generators), to suppliers to end-consumers - with wholesale prices at one end and end-user prices at the other.

The wholesale market in the EU is a system of marginal pricing, also known as pay-as-clear market, where all electricity generators get the same price for the power they are selling at a given moment. Electricity producers (from national utilities to individuals who generate their own renewable energy and sell into the grid) bid into the market: they establish their price according to their production cost. Renewable energy sources are produced at zero cost, and are therefore by definition always the cheapest. The bidding goes from the cheapest to most the expensive energy source. The cheapest electricity is bought first, next offers in line follow. Once the full demand is satisfied, everybody obtains the price of the last producer from which electricity was bought.

This model provides efficiency, transparency and incentives to keep costs as low as possible. There is general consensus that the marginal model is the most efficient for liberalised electricity markets. In fact, it was used by most EU countries before being anchored in EU legislation.

The alternative would not provide cheaper prices. In the pay-as-bid model, producers (including cheap renewables) would simply bid at the price they expect the market to clear, not at zero or at their generation costs.

Overall, it is better for consumers to have a transparent model that reveals the true costs of energy and provides incentives for individuals to become active in generating their own electricity.

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