EU Unveils Price Cap Plan On Non-Gas Generated Electricity
The European Commission has presented a draft proposal meant to intervene in the worsening energy crisis. The draft looks to place a price cap on electricity generated by non-natural gas power producers.
According to Financial Times, the EU is urging its member states to cap the price of electricity via wind farms, nuclear reactors, and coal plants, all of which generate power free of NatGas, at a 200-euro megawatt hour limit.
Enforcing such a price cap would lead to “market outcomes that could be expected where global supply chains functioning normally and not subject to the weaponization of energy through gas supply disruptions,” EU said in the draft proposal.
FT noted that the wholesale electricity prices in Germany skyrocketed because they’re pegged to NatGas, even though some electric power is generated by other sources.
EU also requires members to reduce electricity consumption by at least 5% during peak hours. There was also mention the EU plans to recapture excess profit from power produces that don’t rely on NatGas to help consumers pay power bills.
While shutting the Nord Stream 1 pipeline, Russia said the critical NatGas pipeline to Europe wouldn’t reopen until the “collective West” lifts sanctions placed against Russia over its invasion of Ukraine last February.
EU energy ministers are meeting this Friday to, in part, discuss historical intervention in the energy market.
“A leaked EU draft proposal includes an electricity price cap on inframarginal profits… If true, we would see it to be a better-than-expected outcome for generation companies,” Jefferies analysts wrote in a note.
Following the news of the EU proposals, utilities and renewable energy stocks surged yesterday in Europe. Credit Suisse senior analyst Jens Zimmermann said the draft proposal seems positive for utilities, such as “RWE.”
“Even under a price cap, upward EPS revisions have now become more likely as RWE’s consensus forecasts were never based on the recent sky-high power prices,” Zimmermann said.
RBC analyst Fernando Garcia said the electricity price gap “is quite high, clearly above levelized cost of electricity” and could be high enough not to discourage future investment in non-NatGas generators.
The FT report said for utility companies, it appears the plan could remove uncertainty. The agency noted: “Several member states have complained that Brussels has not acted fast enough. Some, including Spain and Italy, have pushed for the commission to decouple gas and electricity markets.”
The proposal for price caps on non-NatGas derived electricity comes as the utilities across the continent face a massive margin call.