The International Energy Agency detects huge "profits from heaven" for electricity companies due to gas

The International Energy Agency detects huge "profits from heaven" for electricity companies due to gas

The International Energy Agency detects huge

The National Energy Agency (IEA) recommends that the EU governments tackle the billionaire "profits from heaven" (from the English windfall profits) that, he warns, European electricity companies are receiving as a result of the exponential rise in natural gas due to the war in Ukraine, and as a consequence of the current design of the wholesale electricity market, which Spain has been asking for months to reform in the EU.

The price of this raw material has multiplied due to the Russian invasion and this Monday the Spanish pool is going to pulverize all the records, in one more consequence of the Russian invasion. In a report it has just published, the IEA explains that "with the current market design, high gas prices in the EU translate into high wholesale electricity prices in ways that can lead to windfall profits for companies".

Rises in energy costs are, says the IEA, "to some extent unavoidable" when gas prices and emission rights are high, as they have been in recent months. But "current market conditions could lead to an excess of benefits of more than 200,000 million euros in the EU for gas, coal, nuclear, hydroelectric and other renewables in 2022," the agency said in a report. document published last Thursday.

The IEA is a dependent body of the Organization for Economic Co-operation and Development (OECD). His estimate for those extra benefits of electric power is based on two magnitudes. On the one hand, CO2 prices at 90 euros per ton, a level that the carbon market exceeded just before the conflict in Ukraine, although it has fallen sharply after the start of the war, due to fear of its effects. in economic recovery.

The other variable is gas. In this case, the IEA takes as a reference a gas price of 22 euros per million btu, which is equivalent to about 76 euros per megawatt hour (MWh) of gas, a level that is not even half of the current one. In one year, gas has more than multiplied its price by ten. And with the conflict it has pulverized new all-time highs.

On Friday, after the assault by Russian troops on the largest nuclear power plant in Europe, the European benchmark (the TTF) exceeded for the first time in history the barrier of 210 euros/MWh. This new escalation has meant that in the first days of March the Spanish electricity pool has comfortably exceeded 300 euros/MWh, an unparalleled level, which had only been reached last December. Everything indicates that the ceiling reached then in the wholesale market is going to break again due to this escalation of the war. And that it will continue to be transferred to the receipt of consumers, especially those with the regulated rate (PVPC), in which the wholesale market has a direct impact.

Due to EU requirements, the pool is based on the marginal model, in which all technologies charge the price set by the last unit that allows supply and demand to be matched. Under this model, each increase of one euro in the price of gas is an increase of around 2 euros in the MWh of electricity, because the gas plants determine what the rest of the production units receive.

The IEA has just published a Decalogue of measures to reduce the EU's dependence on Russian gas. One of them is to take "short-term measures to protect vulnerable electricity consumers."

This escalation, the IEA points out, "has significant implications from the point of view of access to affordable electricity", as well as for economic incentives for greater electrification of energy end uses. In other words: "With these prices, nothing is electrified", as various experts in Spain have been warning for months.

Thus, the IEA proposes "temporary tax measures to raise taxes on the profits that fell from the sky of electricity companies." The income obtained "should be redistributed to electricity consumers to partially offset the increase in energy bills." "Measures to tax profits fallen from the sky have already been adopted in Italy and Romania in 2022," indicates the IEA.

The body's conclusion on the existence of these undue benefits of power companies is in line with the thesis that the Government of Spain has been defending since last summer. The Spanish Executive, which has also approved, via a bill, a mechanism to cut the excess benefits of nuclear and hydroelectric power due to the rise in CO2 (although the measure will not be in force until the second half of this year) has asked the EU for measures to decouple electricity and gas prices.

This initiative has the backing of several Member States, such as France and Germany, but has so far come up against with the rejection of the northern countrieslike Germany.

But support for Spanish theses is growing. Faced with the huge European dependence on Russian gas, Brussels now seems willing to open its hand in the debate on the sacrosanct marginalist system of electricity price formation.

The Spanish Executive hopes that the European Commission will present as soon as possible the new "toolbox" that Brussels is going to make available to the Member States in the coming days to combat the new escalation in energy prices that this armed conflict has triggered.

Spain defends that the formation of the price of electricity must be decoupled from the volatility of natural gas prices in emergency situations such as this one. For example, through a limit on the price of electricity produced with natural gas and a mechanism that guarantees the subsequent recovery of the costs of the plants that use that fuel, the combined cycles.

The first draft of the Commission known a few days ago already recognized the existence of these benefits from heaven. Brussels is also finalizing a roadmap for Europe to "become independent of Russian gas as soon as possible", in the words of the European Commissioner for Energy, Kadri Simson. Simson does not rule out the scenario of a supply cut from Russia, which since the outbreak of the conflict has continued to sell gas to Europe. Energy has been left out of the EU sanctions on the Russian economy for now.

The IEA report highlights that in 2021 Russia accounted for almost 40% of the EU's consumption, with some 140 bcm (billions of cubic meters / year) through gas pipeline and another 15 bcm by ship.

Among the measures proposed by the IEA is not signing new gas supply contracts with Russia and seeking alternative suppliers for this raw material, in addition to introducing minimum storage obligations, accelerating the start-up of renewables, rethinking the nuclear shutdowns scheduled for the next two years or even less use of heating in homes.

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