The European Commission is expected to propose windfall taxes targeting both low-carbon power generators and fossil fuel companies as electricity prices in the wholesale market continue to sit way above normal levels.

As part of a raft of proposals set to be discussed this week by European Union energy ministers, the commission will also seek to cap Russian gas prices and introduce mandatory targets for reducing electricity use, EC President Ursula von der Leyen said Sept. 7.

"We must cut Russia's revenues, which [President Vladimir] Putin uses to finance this atrocious war against Ukraine," von der Leyen said in a press conference. Russia is an "unreliable supplier and is manipulating our energy markets," von der Leyen added.

The EC president's comments came after the Nord Stream 1 gas pipeline from Russia to Germany was closed indefinitely Sept. 2 following the discovery of an oil leak. Officials in Germany cast doubt on Russian state-owned Gazprom's explanation for the suspension, which followed the Group of Seven nations agreeing to a price cap on Russian oil.

Von der Leyen said Russia's manipulation of the EU's energy market had led to "astronomic" electricity prices for consumers. Year-ahead power contracts in Germany were at €536/MWh on Sept. 6 compared to €41/MWh a year ago, exchange data showed. Prices reached a record €985/MWh on Aug. 26.

Proposed measures

The commission's proposals will "protect vulnerable consumers and businesses and help them adapt," von der Leyen said.

The measures include capping profits made by low-carbon electricity producers, which von der Leyen said are making "revenues they never dreamt of." The same will apply to fossil fuel companies, with the commission proposing a "solidarity contribution" from the excess profits made during the ongoing crisis. The proceeds will be rechanneled to EU member states to support vulnerable consumers.

The commission will also put forward a mandatory target for reducing electricity at peak hours, with low nuclear production in France and poor hydropower generation contributing to the spiraling prices and pointing to possible power shortages in the winter.

Utilities will receive liquidity support to help them cope with the market volatility, von der Leyen said. Such companies "are currently being requested to provide unexpectedly large amounts of funds, which threatens their capacity to trade and the stability of the future markets," the president said.

Along with the price cap on Russian gas, officials at the commission are also said to be discussing the possibility of a cap on the price of gas in power generation, among several other possibilities to combat spiraling market prices.

Not cheap, but necessary

Since Russia invaded Ukraine on Feb. 24, the EU has sought to dramatically reduce and eventually end its dependence on Russian energy.

The REPowerEU plan seeks to cut the bloc's Russian gas demand by about two-thirds, or about 100 billion cubic meters, before the end of 2022, in part by ramping up liquefied natural gas imports and diversifying deliveries of pipeline gas. Meanwhile, renewables deployed this year will save 8 Bcm of gas equivalent, von der Leyen said.

Member states are being urged to reduce gas demand by 15% over the winter while ramping up their gas storage reserves. Von der Leyen said gas storage in the EU is now at 82% — above the 80% target for Nov. 1.

"That hasn't been cheap, that hasn't been easy, but it is necessary," Ditte Juul Jørgensen, director-general for energy at the European Commission, said Sept. 7 during a panel discussion organized by Brussels-based think tank Bruegel.

EU members Germany, Sweden and Finland have all unveiled national measures to reduce gas demand and combat rising energy prices in recent days.

EU policymakers are ultimately looking for simple and implementable measures that protect the integrity of the European market, Jørgensen said. While the measures will be pushed through on an emergency basis for the coming winter, the commission will also explore longer-term reforms of electricity market design, with proposals due to come in 2023.

"I hope we can all agree that a revision of electricity market design is ... something that should not be done overnight," Jørgensen said.

Claire Waysand, executive vice president and general secretary at French utility Engie SA, agreed that the wider reforms ought to be carefully thought out. "Touching market design is something you should only do with a trembling hand," Waysand said during the Bruegel panel.

The volatile market environment means such revisions are necessary, though reforms should also ensure that future investment incentives remain strong, Waysand said.

In the longer term, lawmakers should focus on phasing out gas in power generation and heating, according to Francesco Starace, CEO of Italian utility Enel SpA.

"We need to stop burning gas for electricity as fast as possible," Starace said at the Bruegel event. "We need to stop using gas to heat our homes, and that means drastic fast implementation of heat pumps."

"If we succeed, Europe is likely to halve its gas demand in the next five to 10 years," Starace said.

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