Saturday

30th Sep 2023

Opinion

Paying consumers who save most energy could tame gas prices

  • Through the auction, consumers could be paid several times the market price of gas for not consuming gas. That may seem counterintuitive, but it simply reflects the fact that there is an 'externality' when consumers reduce their demand (Photo: Tori Rector, Flickr)
Listen to article

The saga of capping gas prices is far from over, and the EU is under pressure to balance high energy costs, maintain price signals, and meet its green transition targets — without any negative long-term impact on the energy market design.

The increase in the gas price affects not only gas consumers, but also increases the electricity price, and affects the entire economy.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

  • How much can you cut? (Photo: jiva)

The European Commission has sought to address the impact on consumers through, among other measures, the application of caps on the revenues of some electricity generating plants and windfall profit taxes on energy companies. However, a large share of the windfall profits are captured by gas producers which reside outside the EU, and member states cannot tax those.

Hence, various proposals have been made to cap the wholesale gas market price, with the commission landing on a gas price cap of €275 per megawatt hour for month-ahead title transfer facility (TTF) contracts.

The commission's "market correction mechanism" aims at limiting episodes of excessive natural gas prices which are unrelated to prices at other gas exchanges. This mechanism would be activated if the month-ahead TTF derivative settlement price exceeds 275 €/MWh for two weeks and the TTF European Gas Spot Index is €58 higher than the reference price during the previous 10 trading days. When activated, orders for month-ahead TTF derivatives with prices above €275 would not be accepted.

Some member states have already criticised this, claiming that it is insufficient. As discussed in a recent policy paper by EPICO, more ambitious price caps on gas would result in an increase in gas demand and could cause gas supply shortages.

In addition, if a cap or corridor is applied on the TTF gas price index, gas companies which sell gas at a price linked to the TTF may argue that that index no longer reflects the true market value of gas, and will sue for a change in the index used in the contract if the mechanism has a material impact on their sale price.

Further, while the mechanism would help reduce gas price volatility, it would not reduce the gas-price level, and sellers could circumvent them simply by moving to over-the-counter (OTC) transactions.

Russia has also threatened that it would cease all energy exports to the EU if a cap were to be applied, which would be problematic for member states which are still reliant on Russian gas imports. Worse, if the cap is applied, sellers of liquefied natural gas might divert their cargoes to other countries, potentially causing severe gas supply shortages in the EU.

In contrast, measures aimed at reducing gas demand would reduce gas imports, therefore reducing the market price of gas and electricity across the EU. The problem is that while all member states would benefit from a reduction in gas prices resulting from a reduction in gas demand, they have incentives to free-ride, waiting for other member states to reduce their own national demand.

Gas reduction auctions

As a solution, the commission could hold centralised pan-European gas demand reduction auctions.

Consumers could participate in these auctions, reducing their gas and/or electricity demand by some amount, in exchange of a payment for each unit of gas demand reduced (electricity demand reductions translate into gas demand reductions to the extent that gas is used to produce electricity).

Successful bidders would be paid a price that could be higher than the market price of gas, recognising the fact that their reduction in gas demand reduces the market price of gas across the EU.

Through the auction, consumers could be paid several times the market price of gas for not consuming gas. That may seem counterintuitive, but it simply reflects the fact that there is an 'externality' when consumers reduce their demand: not only do the consumers who reduce their demand benefit from the fact that they buy less gas, but all other consumers also benefit from the interlinked demand reduction and lower gas price — the 'externality' in this case.

As a result, for example, if the market price of gas is €100/MWhg, it may make perfect sense to pay consumers up to €1,000/MWhg for each MWHg of avoided gas demand (i.e. 10 times the market price of gas).

Member states would have to contribute to the funding of these auction payments in proportion to their own annual gas demand, regardless of where the consumers who reduce their demand are located. The reason is that all member states will benefit from the auction in the form of lower gas prices, and the benefit for each member state is in direct proportion to its own national gas demand.

The volume of 'demand reduction' accepted in the auction need not be a fixed or even a predetermined amount, but could be determined dynamically, taking stock of the situation in the gas market on an on-going basis.

To allay concerns about employment impacts, industrial consumers who commit to reducing their gas demand because of their participation in the auction could be required to continue paying workers while they themselves receive payment for reducing their demand.

Free-riding could be further discouraged in the case where the consumer does not reduce its demand by agreed target amount for which they were paid. In that case, the consumer would not get paid (or would have to return money received from the auction administrator) and the penalties specified in the auction rules would apply. The precise level of the penalties is not important; all that matters is that the penalties are sufficient to discourage participation by consumers who do not intend to reduce their demand.

However politically challenging it may be for member states to endorse such a centralised measure, they would all gain from it. It would achieve an immediate reduction in the price of natural gas (as traders anticipate that less gas will be needed in the future) and reduce the risk of gas shortages, to the benefit of consumers across the EU.

Author bio

Dr Bernd Weber is founder and director of EPICO KlimaInnovation, and visiting professor of EU energy policy at the College of Europe. Oscar Arnedillo is managing director at NERA Economic Consulting in Madrid. Sam Williams is EU policy specialist for energy and climate at EPICO KlimaInnovation.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

EU is 'close to the solution' on gas price cap

The outcome of the two-day meeting of EU leaders did not deliver any clear agreement on whether and how to limit gas prices — but some believe EU ministers will agree on emergency measures in the coming weeks.

How the gas lobby is fuelling the cost-of-living crisis

An investigation by COE reveals oil and gas lobbyists have enjoyed unprecedented access to EU decision-making. As a result, a series of critical decisions on tax, energy-infrastructure, and regulation put fossil-fuel industry profits above millions at risk of energy poverty.

EU commission set to unveil 'dynamic' gas price cap proposal

The European Commission will present on Tuesday (18 October) a package of measures to tackle the energy crisis, including a temporary "dynamic" gas price cap mechanism aimed at curbing price volatility — here's what came before.

Agenda

Gas price-cap tops agenda This WEEK

On Monday, we will also find out of there is a deal among European Parliament and EU government negotiators on the agreement to reform the bloc's Emissions Trading System (ETS) and on the Social Climate Fund.

Punish Belarus too for aiding Putin's Ukraine war

While Belarus has not sent its own troops to fight Russia's war in Ukraine, the Minsk dictatorship has been heavily involved. As a result, Belarus must be punished for its involvement — what can the world do to sanction Belarus?

How do you make embarrassing EU documents 'disappear'?

The EU Commission's new magic formula for avoiding scrutiny is simple. You declare the documents in question to be "short-lived correspondence for a preliminary exchange of views" and thus exempt them from being logged in the official inventory.

Column

Will Poles vote for the end of democracy?

International media must make clear that these are not fair, democratic elections. The flawed race should be the story at least as much as the race itself.

Latest News

  1. EU women promised new dawn under anti-violence pact
  2. Three steps EU can take to halt Azerbaijan's mafia-style bullying
  3. Punish Belarus too for aiding Putin's Ukraine war
  4. Added-value for Russia diamond ban, as G7 and EU prepare sanctions
  5. EU states to agree on asylum crisis bill, say EU officials
  6. Poland's culture of fear after three years of abortion 'ban'
  7. Time for a reset: EU regional funding needs overhauling
  8. Germany tightens police checks on Czech and Polish border

Stakeholders' Highlights

  1. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  2. International Medical Devices Regulators Forum (IMDRF)Join regulators, industry & healthcare experts at the 24th IMDRF session, September 25-26, Berlin. Register by 20 Sept to join in person or online.
  3. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  4. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA
  5. International Medical Devices Regulators Forum (IMDRF)Join regulators & industry experts at the 24th IMDRF session- Berlin September 25-26. Register early for discounted hotel rates
  6. Nordic Council of MinistersGlobal interest in the new Nordic Nutrition Recommendations – here are the speakers for the launch

Stakeholders' Highlights

  1. Nordic Council of Ministers20 June: Launch of the new Nordic Nutrition Recommendations
  2. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  3. ICLEISeven actionable measures to make food procurement in Europe more sustainable
  4. World BankWorld Bank Report Highlights Role of Human Development for a Successful Green Transition in Europe
  5. Nordic Council of MinistersNordic summit to step up the fight against food loss and waste
  6. Nordic Council of MinistersThink-tank: Strengthen co-operation around tech giants’ influence in the Nordics

Join EUobserver

Support quality EU news

Join us