EU desires customer compensation from European energy providers

EU chief proposes energy market reforms
EU chief proposes energy market reforms

Global Market
by 5paisa Research Team Last Updated: 2022-09-15T17:44:34+05:30

The European Executive has come up with a unique plan. It wants the energy companies to provide funds of €140 billion which can be used to alleviate the problems of households struggling with soaring energy bills. This is nothing new. The argument is that when energy prices are rising rapidly, these energy companies do make a lot of money from customers. Now it was time for these companies to share some of these gains with the customer in the form of price breaks. EU has been facing one of the worst energy crises in recent memory. 

EU officials have called this a necessary response to energy supply shortages and high prices. The officials have also clarified that these were extreme emergency measures and were being taken up as a special case and may not be the template going ahead. EU is clearly going to use this opportunity to move rapidly to greener fuels. According to the EU, the era of cheap fossil fuels was over. Russia had worsened their problems, but for now the focus was entirely on addressing the problem of soaring energy bills for the consumers.

As the first step, EU is going to ask all the fossil fuel extractors to give back 33% of taxable surplus profits for the year 2022. That is an emergency measure and is likely to be used to alleviate the pressure that consumers are facing currently. This could have repercussions on the UK too. For instance, the new British PM, Liz Truss, may have to rethink her promise to business that the 25% windfall tax would not be extended on energy companies. This tax had been imposed when Rishi Sunak was the Chancellor of the Exchequer. 

While the EU is forcing the energy extractors to part with some of their profits in these tough times, they are also putting some onus on the consumers. For instance, EU member states will have to sign up to a legally binding target to cut electricity use by 10% overall and by 5% during peak hours. This would be done via a mix of incentives and campaigns. Demand reduction is the one way the EU can handle Russia shutting off gas supplies, but for now, they will also be extracting the pound of flesh from the energy companies. 

While the initial target is that oil and gas companies pay 33% solidarity contribution on their profits, EU member states would be free to set higher levies. One more condition that the EU plans to impose is that low-carbon power generators like wind, solar and nuclear firms, will have their revenues capped at €180 per KW hour. That is almost half of the current market prices. Most of these companies have enjoyed a profits bonanza for too long and that is now going to be reduced, if not entirely eliminated, as per the commission. 

The fund raising will be humongous and enough to take care of the temporary challenges. For instance, the EU officials expect to raise close to €25 billion from the tax on fossil fuel producers. In addition, the cap on low-carbon firms will help to raise another €117 billion. These monies are most likely to be recycled to consumers as direct rebates and will effectively fund insulation and other efficiency measures or the switch to low-carbon technologies. Either ways, the pressure on the consumers would be reduced.

Some of the suggestions are to set windfall taxes at minimum 50% and go up to 90% to spare ordinary people from skyrocketing energy bills. But, that may not be practical even if you consider that the power crisis will get worse in the winter months. Gas and electricity prices have already hit all-time highs since the Russian invasion of Ukraine. Later, with the EU deciding to side with America on sanctions on Russia, there have been deliberate cuts in the supply of gas to Europe through Nord Stream 1. Interestingly, now Russia accounts for just 9% of EU gas imports, down from 40% before the invasion. Putin has reasons to worry.

The eventual outcome of all this could be that Russia may end up being the big loser in the bargain. For the last 50 years, Russia had laughed all the way to the bank by supplying oil and gas to European consumers. They European consumer had become used to cheap gas and their purchasing power ensured that EU never looked for alternatives. Now EU realizes that it can manage without Russian gas and countries like India, China and Turkey cannot match up the per capital GDP of Europe. It could be an interesting end to the story.

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