Oct 7, 2022
Friday Express: the week’s energy highlights
European energy woes rage on
EU countries move to renounce the Energy Charter Treaty
The Energy Charter Treaty regulates energy affairs, providing legal guarantees for cross-border investments for energy companies. However, some argue that the Treaty works against the Paris Agreement.
In recent years, fossil fuel companies used the Treaty to demand financial compensation from governments for decarbonization policies. Treaty allows companies to sue governments via arbitral courts.
Since 2015, 97% of litigations via the Treaty come from fossil fuel companies resulting in governments paying $52 billion in damages.
Italy withdrew from the Treaty in 2015, and Poland recently drafted a bill to withdraw. Spain entertains following suit demeaning the Treaty incompatible with climate change policies, as do France, Netherlands, and Germany.
This week, on 6 October, the European Commission proposed a Subsequent Agreement on the interpretation of the Energy Charter Treaty, reiterating that intra-EU arbitration is incompatible with the EU Treaties.
In 2020, the Treaty’s renegotiation began, and the process continues until now, driving intense political activity.
Natural gas price cap
European Union struggles to agree on a plan to address European energy prices. The current European Commission draft relies on inframaginals: producers that generate electricity from sources other than natural gas.
Since natural gas prices in Europe remain high, electricity sources like PV, wind, hydropower, and nuclear earn high and unexpected profits. The plan aims to tax the extraordinary earnings above a set cap (set by natural gas prices) and then redistribute the funds to help consumers face high natural gas prices.
The European energy market diversity makes solutions complex. The energy mix varies significantly between member states. Countries with lower shares of natural gas generation and energy imports will receive more funds.
Countries that import a large share of their energy have little income to tax from their national energy companies. Some countries’ energy mix has a low-natural gas share in their energy mix, but its power comes from long-term agreements being unable to tax extraordinary profits.
The President of the European Parliament, Roberta Metsola, contends for joint EU procurement of natural gas. Outbidding between individual countries increases prices for all of Europe.
Ursula von der Leyen, the president of the European Commission, also argues for joint procurement. Germany announced a €200 Billion plan to protect german consumers from high natural gas prices. Its EU partners’ pushback to the plan finally led Germany to agree with the joint procurement.
Several countries argue for a fixed cap. Experts advise against it, since price caps disincentivize savings, eventually leading to rationing.
Some European countries propose to address the issue via a dynamic price cap. The European commission’s proposals include a temporary price cap or a price cap for natural gas use in power plants only. Any price cap must tie to some demand reduction for the European Commission.
