Not even the EU lowers our energy bills

An analysis made by Dumitru Chisăliță, president of the Intelligent Energy Association, shows that the long-awaited EU measures for the energy and gas market do not bring lower bills. After the destruction of the hopes of Romanians regarding obtaining lower energy bills, by too many OUGs, the eyes were fixed on the EU. But we learned that many EU countries are mainly interested in raising money for the budget and less in solving consumer problems.

The EU recently approved 3 measures for the energy crisis: some have the role of obtaining additional money for the budget, taking advantage of the crisis, and only one for an indirect reduction in the price of electricity, but which will not have an effect for more than 3-4 months .

The EU measures adopted are:
– The introduction of a solidarity tax for the fossil fuel sector, in effect an overtaxation of activity in the crude oil, natural gas, coal and refinery sectors.
– Capping market revenues at €180/MWh for electricity producers, including intermediaries, using so-called inframarginal technologies to produce electricity, such as renewables, nuclear power and lignite.
– Mandatory reduction of electricity consumption by 5% during peak hours.

1. Over-taxing fossil fuels – it is not a measure to reduce the price of energy and gas in the short term, but it is a measure to maintain high prices in the long term.

Russia continues to cut gas flows as part of their war strategy, prices are not realistic and thus they have lost their importance in driving market behavior. Moreover, there would be windfall profits that these companies would never have relied on and therefore had no right to collect. At the same time, Europe embargoed Russian oil products, thus artificially reducing the supply and causing higher prices for oil products due to the difference between demand and supply.

But these high prices have driven the development of new technologies – such as SMRs (small nuclear reactors) – and the start of new investments that otherwise would not have started. This process must be encouraged, even forced to continue, including through fiscal measures.

If, after the war, gas were to flow from Russia again, prices would fall, additional revenues would again fall rapidly, and then again no investment in new production capacity would take place. But this scenario is untenable, as the EU wants to get rid of Russian gas and oil anyway. And so, all of today’s high revenues should be used to invest in new generation capacity and increased energy efficiency at consumers, which will ensure that there is sufficient energy generation capacity in the future and affordable prices for it.

Investors in renewable, hydro, nuclear sources have taken into account the possibility that some fossil fuels will become insufficient, and for this they should not be penalized, but encouraged to invest even more, because in the absence of measures to increase production and make consumption more efficient, that must be taken today, future energy crises will be much tougher than this one

Europe is a net importer of energy and Europe is getting poorer due to extremely high energy prices. This cannot be prevented by dividing the cake in a different way, the same cake remains. There is no choice but to do what needs to be done: work hard, work efficiently, work smart and collaborate to increase resource quantities, production capabilities and energy efficiency. Now we have to give up populism and act on it, while protecting vulnerable consumers (households and businesses).

Any tax distorts and changes the behavior of market actors. But tax theory says that to minimize this distorting effect, taxes should be placed low in the value chain.

2. Capping the income of electricity producers – it is not a short-term price reduction measure, but it is one that can bring energy shortages.

The cap should apply to producers and should eliminate income for power producers from low-cost technologies. The idea seems simple, but it is not easy to implement without creating slippages.

The main issue is how to determine the actual income that each producer has earned with his capabilities. They may have sold their output in forward or long-term contracts at a much lower price than current prices. In this case, the producer has no profit at all, but his counterpart (supplier or consumer) makes profits. Second, a producer does not sell its output in a single transaction, there can be many transactions in the forward, day-ahead and intraday markets. And finally, the remaining imbalances are settled with the imbalance price. Third, these transactions are normally made for a portfolio of contractual assets and liabilities. In this case, it is impossible to monitor all transactions. Fourth, there is self-production by prosumers. In this case, there is no explicit transaction, but the prosumer benefits by avoiding paying the high retail price.

It is obvious that the correct and fair implementation of the price limit to avoid additional income is impossible. One could opt for a more basic implementation, but then the result would not be fair, as unprofitable companies are overtaxed and other companies with potentially huge profits remain untouched.

3. Mandatory reduction of electricity consumption by 5% during peak hours – measure to reduce consumer bills, but disputed by many countries and debatable whether it will be implemented

In fact, the only measure to reduce consumer bills taken by the EU is the mandatory reduction of electricity consumption by 5% during peak hours. Chisăliță claims that this measure is difficult to apply, is unpopular and will show its fruits over time, about 4-5 months after it starts to work effectively. In other words, its effects will be felt in the spring. Much too late for many consumers, who will not have that patience, especially in the dead of winter.

Analyzing the electricity consumption profile in Romania from October 1, 2022, the analyst claims that there were two consumption peaks, when consumption was higher than energy production. The morning peak which was covered by hydro and imports (cheaper than gas produced power) and the evening peak which was covered by hydro, gas, coal and imports.

The increase in demand for energy at peak consumption causes its price to rise. Thus, following for the same day the prices at which energy was sold per hour, we find that at peak hours it is 3-4 times higher than in other hours. These high prices that are indexed in the contracts that are actually concluded on the market have determined over time (6-12 months) the increase in the price of electricity.

If there was enough electricity at peak consumption, produced from cheap sources, and no energy imports were needed, then prices would not have risen. Thus, the decrease in energy prices could be done in the medium term by shifting the consumption curve, so that this large difference between demand and supply at peak consumption and implicitly these high prices no longer appear.

Source: Cotidianul RO by

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