EUologist – Kata Moravecz

The EU’s most important task in the coming months will be to fix the energy crisis affecting the whole of Europe. The instability of the energy market could lead to further price increases, which could put particularly vulnerable residential consumers in a difficult situation. To avoid this, the European Commission proposes a complex strategy to control the price of electricity, based on energy consumption and compensating people.

The Russo-Ukrainian War The EU’s electricity market is more vulnerable than ever due to a drop in Russian gas supplies. Even if the supply is continuous, fluctuations in gas supply greatly increase the market price of electricity, which may become more expensive by 2024-25, according to a recent report by the European Commission. In Europe, the price of electricity is largely determined by the price of gas, which is a significant part of its production, so if the price of gas on the world market increases, electricity also becomes more expensive. In recent months, electricity consumption has increased due to high temperatures and more than half of France’s nuclear power plants Closed for maintenance, which will be completed only in winter. All these factors raise the price of electricity, which can put residential consumers, especially low-income European citizens, in a very difficult situation. That is why the European Council asked the European Commission

Urgent measures should be taken to ensure affordable electricity supply.

The commission complied with this request, at least according to the first set of unofficial recommendations that came into the urologist’s possession. The proposal focuses on three key measures that have a good chance of improving the current situation. group

  • Considers it necessary to reduce the demand for electrical energy,
  • Regulating the selling price of small, non-price-regulated technologies such as nuclear or green energy distributors;
  • and a reduction in the VAT content of electricity for some consumers.
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The report also draws attention to the fact that introducing these measures together is beneficial as these measures mitigate the negative effects of each other and are substantially sustained together. But let us look at the consequences of the proposals.


Demand reduction

The proposal essentially calls for the EU to introduce measures to encourage market participants to use less electricity. This will reduce demand for electricity, leading to lower prices.

In practice, this would work in such a way that some of the market participants offer to reduce their consumption in exchange for state compensation. In this way, the state can moderate the costs of reducing consumption because it can accept cheaper concessions.

In the case of the public, no similar system for compensation is proposed, the Commission recommends that Member States should reward a residential consumer with a financial rebate if they reduce their electricity consumption.

Additionally, in the case of electricity consumption, it should be noted that the cost of electricity is higher during peak hours of the day and supply is also more uncertain during this time. Therefore, market participants should be encouraged to use electricity at less busy times, even at night, for example not in the evening when population consumption is the highest.

By definition, this proposal could increase costs for Member States, as the burden of compensation would fall on them.


VAT rebates for the most vulnerable consumers

Reducing VAT on electricity is a simple way to reduce electricity bills for some social groups, but also for small businesses in difficult circumstances. The EU has already removed all legal barriers to this measure, and the Commission emphasized that member states are already free to use VAT reductions if they wish, even in the case of businesses.

The disadvantage of this proposal is that the VAT exemption would burden the budgets of Member States, as unpaid VAT represents a loss of revenue for the state. A problem may also be that price declines encourage consumers to save, but this is offset by a set of earlier plans to reduce demand.

Price cap for non-price regulated power generation

As we have seen, the previous two measures would mean additional costs for Member States. The third element of the proposal package, a price cap introduced for non-price-regulated energy producers, aims to address this issue.

A non-price-regulated energy producer is a market actor, such as a nuclear power plant or green energy investment, that does not have a significant impact on market prices. For example, nuclear power plants produce energy at an almost constant price, but following the increased cost of gas and the energy produced from it, electricity produced from nuclear power is now sold at a higher price. Therefore, in the case of these producers, we can actually talk about “additional profit”, which will be defined by the European Union.

Our picture is an example


This does not mean that people will receive energy at the production price, but a portion of the cost of electricity above the price cap will go to the state, which will fund the previous two proposals. In this way, budget constraints will be removed for both demand and VAT reduction measures, which will remain stable as long as the price of electricity remains high.

How compelling would that be?

In relation to the set of proposals, the question arises to what extent these measures should be incorporated into EU law and made mandatory for member states. The European Commission has outlined three options in this regard. The first option is that all of these are drafted in the form of a recommendation only, in which no action is binding on member states, and relevant legislation and detailed regulations can be developed at member state level. This has the advantage that member states can create the legislation that best suits them, but this can lead to chaotic regulation at the pan-European level.

A second option is to prepare a uniform body of legislation at the EU level, but its introduction is not mandatory for member states, who may decide not to introduce the regulation partially or entirely. However, the introduced law will have the same wording in all states, which will reduce legal confusion.

A third possible way is to create EU-wide, binding legislation. At that time, all member states must introduce all points of the final set of plans. The problem with this is that member states have to add to the many laws that currently deal with the energy crisis so that their legal framework does not conflict with the new EU law.

The Commission’s unofficial proposal prefers the second option because, according to them, regulations do not have to be mandatory to achieve a significant result at the European level.

The European Commission’s proposal aims only at short-term management of the electric power crisis. A long-term solution is for the EU to switch to green energy and, for example, the 55 suitable for environmental synthesis You see in the introduction. Of course, the current proposals are still far from their final form, but it is already clear that the union will deal with the increase in the price of electric energy in a significantly different way, with the Hungarian government reducing utility bills.

EU energy ministers will discuss the proposals at an extraordinary meeting in Brussels on Friday. According to EUrologus, ministers are likely to hold another extraordinary meeting this month on the agenda of an extraordinary, informal summit in Prague in early October. A final decision is expected then or two weeks later at a regular EU summit.


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