In the EU, each EU country can decide its own energy mix, but it has to follow the rules of the internal EU energy market and take 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, at affordable prices. The EU energy sector responds to market forces so that energy companies strive to be as competitive as possible.
EU action and measures
In the course of 2021, there was a notable increase in EU wholesale energy prices. There were a number of causes, but the prime driver was clearly the rise in the gas price worldwide – a result of the surge in global demand, notably in Asia, as most countries emerged from the Covid-19 pandemic. This led, for example, to lower volumes of liquefied natural gas imports into Europe.
At the same stage, a combination of lower supplies of gas, a longer heating season in 2020-21 and unfavourable weather conditions for producing renewable energy (less sun, less wind) created an unusual undersupply. To a lesser extent, an increased carbon price under the Emissions Trading System (ETS) also contributed to the adverse market situation.
Toolbox of measures
In response to the spike in wholesale prices, the Commission and EU countries expressed concerns about how this might be passed on to end-users, in particular to the most vulnerable consumers. To clarify what measures are possible under existing EU rules, 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 field of responsibilities.
In the wake of the Russian invasion of Ukraine early 2022, which further amplified the market price difficulties that started in 2021, the Commission published on 8 March a second Communication: “REPowerEU: Joint EU action for more affordable, secure and sustainable energy”.
The communication outlines a series of measures that can be taken at EU or national level to address the higher energy market prices, such as the possible taxation of windfall gains by energy companies, but it also looks at broader issues related to security of supply, seeking to make the EU energy sector more resilient. The REPowerEU plan aims to increase the resilience of the EU-wide energy system based on 2 pillars
- diversifying gas supplies via higher Liquefied Natural Gas (LNG) and pipeline imports from non-Russian suppliers, and larger volumes of bio-methane and renewable hydrogen production and imports
- reducing faster the use of fossil fuels in our homes, buildings, industry and power system by boosting energy efficiency, increasing renewables and electrification, and addressing infrastructure bottlenecks
The Commission will present by mid-May a proposal to phase out EU dependency on Russian gas, oil and coal by 2027, backed by the necessary national and European resources. The proposal will also include options to optimise the electricity market design so that it better supports the green energy transition.
Security of supply and affordable energy prices
Following the REPowerEU plan, EU leaders met in Versailles and adopted the Versailles declaration on 10-11 March 2022, which covers Russia's aggression against Ukraine and underlines how the EU can reduce energy dependencies and build a more robust economic base.
On 23 March, the Commission published the Communication Security of supply and affordable energy prices: Options for immediate measures and preparing for next winter, which responds to the EU leaders' call in the Versailles declaration. The new communication sets out ideas for collective European action to address the causes of the problem in the gas market and ensure security of gas supply at reasonable prices for citizens and business. It offers several options to mitigate it, including financial compensation and direct intervention in the functioning of the wholesale electricity markets. Among the proposed measures, the Commission includes the capping or modulation of the gas prices and the creation of a Task Force on common gas purchases at EU level.
Further details on REPowerEU are scheduled to be published before the end of May.
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 our dependence on Russian fossil fuels. The Playing my part report suggests 9 individual actions, that if implemented by many, will make a big difference for the planet.
Role of energy efficiency
Energy efficiency aims at a progressive reduction of energy consumption across all sectors, and is a necessary pre-condition to the clean energy transition. In the context of a periodic spike in the EU energy prices, energy efficiency measures and investments also 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 European Commission estimates a potential for primary energy savings arising from high-efficient cogeneration up to 30 billion cubic metres of gas saved per year, which will contribute to reaching the EU’s 2030 energy efficiency target. In addition, the energy savings obligations in the recast Energy Efficiency Directive will allow energy savings equivalent to 9 billion cubic metres of gas per year.
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
- 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 follows a system of marginal pricing, also known as pay-as-clear market, meaning that everybody gets the same price for the electricity they are producing at that 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 cheapest. The bidding goes from the cheapest to most expensive. 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 the model used by most EU countries before being set in EU legislation and most electricity markets worldwide are based on this mechanism.
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 (sometimes called “prosumers”).
- Note by the Agency for the Coordination of Energy Regulators (ACER) on high prices
- Winter Supply Outlook for 2021/22 by the European Network of Transmission System Operators for Gas (ENTSOG)
- 23 March 2022: Press release
- Communication 23 March 2022: Security of supply and affordable energy prices (COM(2022)138) and its annex
- REPowerEU Communication 8 March 2022 - REPowerEU: Joint European Action for more affordable, secure and sustainable energy (COM/2022/108 final)
- Media package 8 March 2022: Press release, Questions & Answers, Factsheet REPowerEU
- Communication October 2021 - Tackling rising energy prices: a toolbox for action and support (COM/2021/660 final)
- Media package October 2021: Press release, Questions & Answers, Factsheet Energy Market, Factsheet Toolbox
- Quarterly gas and electricity market reports
- Electricity market design
- Energy prices and costs in Europe