EU works to decouple gas and power prices

EU Commission president Ursula von der Leyen appears to be spearheading plans to decouple regulated electricity prices from the going rate for natural gas, following comments in her State of the Union parliamentary address on September 14.

Such a measure is likely to cap the price that can be charged by "low-cost" electricity producers, such as renewable power plants.  Von der Leyen told members of the European Parliament: "These companies are making revenues they never accounted for, they never even dreamt of. In our social market economy, profits are good, but in these times it is wrong to receive extraordinary record profits benefitting from war and on the back of consumers."

Pressure to remove the link from gas to electricity prices is growing as a way of containing consumer bills. The index from natural gas to electricity comes from a time when ordinary natural gas-level prices were expected to subsidise payments to renewable power plants, and other providers of marginal power quantities.

In the EU's market design, formulated some 25 years ago, the electricity price is refreshed at 30-minute intervals based on the marginal cost of the last generation MWh switched on to satisfy demand.  In many cases this is a gas-fired unit, given the role of natural gas in supplying baseload power.

A 500% - 700% price surge since last year has left the gas-to-power price link highly vulnerable to policy changes, particularly in light of Russia's attempts to weaponise European gas transport.

Austrian chancellor Karl Nehammer expressed his support for changes to the market design in August. Von der Leyen picked up on his point in the Union address, arguing Russia's flaring of gas to avoid serving European customers suggests it is essentially able to wreak havoc to electricity markets. der Leyen said: "Russia keeps on actively manipulating our energy market. They prefer to flare the gas than to deliver it. This market is not functioning anymore."

EU commission proposals outlined in the Union speech could raise €140bn for member states to "cushion the blow" of the ongoing energy crunch, der Leyen predicted. Further measures could include a special "crisis" charge for major oil, goal and coal producers, while some of the revenues will be used to fund a new hydrogen investment bank, allowing infrastructure delivery for low-carbon hydrogen fuels.