EU Energy Plan Beats Inaction

A perfect storm has hit European energy markets, prompting leaders to intervene. It’s not all bad news for investors.

The combination of extreme summer heat, declining Russian gas supplies, unscheduled shutdowns of French nuclear plants, droughts that reduce hydropower and low river water levels that limit coal supplies have pushed natural gas prices to unprecedented levels. They are closely linked to the cost of electricity, as it is the fuel that often determines the marginal price of European electricity markets, as in the US.

“August was the most expensive month for electricity in Europe, due to rising gas prices,” says Fabian Rønningen, analyst at consultancy Rystad Energy.

Costs are expected to remain high for years. Households and businesses are being squeezed and politicians are being forced to act.

“We have reached the point where doing nothing is not an acceptable option,” says Vincent Ayral, an analyst at JP Morgan.

The current market design is “no longer fit for purpose. That is why … we are now working on an urgent intervention and a structural reform of the electricity market,” European Commission President Ursula von der Leyen said on Monday. European Union energy ministers meet next week to work out how the bloc can lower prices.

Decisive, coordinated action at EU level will help avoid an endless series of reactionary national measures, as well as mitigate some of the devastating economic consequences of doing nothing. The policy action will likely reduce the profits of some European gas suppliers and utilities. Shares in both sectors fell about 5 percent in the days after Ms. von der Leyen’s speech, but recovered slightly. However, for most energy-intensive industries, containment of today’s extreme electricity prices will bring some relief and reduce the risk of a deep recession.

Western leaders are bracing for the possibility that Russian gas flows through the key Nord Stream pipeline may never return to full levels. The WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe and how it could ripple across the world. Illustration by David Fang

The focus is on short-term measures. Interest in structural market reform has grown, but it cannot be rushed. “Market design reform typically takes years. It’s an extremely complex universe of rules and we have to be very careful with risky exchanges,” says Simone Tagliapietra of the Bruegel think tank.

For now, the EU’s primary goals for its short-term fixes are to create a secure supply of affordable energy while maintaining incentives for green investment, preserving the single market and minimizing costs.

There’s a huge range of options, but a leaked document suggests early thinking: a comprehensive package of demand-cutting efforts and a cap on profits from lower-marginal-cost energy sources to fund measures to lower bills for households and small and medium-sized businesses . So-called windfall taxes are seen as incompatible with the package — welcome news for some of the region’s natural gas suppliers and utilities.

The plan could also allow energy-intensive companies, such as chemical producers, to receive some compensation for reducing their use. Utilities would be hurt by a profit cap, but it doesn’t have to be a disaster if the cap is high enough to filter out only the extremes not built into the plants’ original investment cases.

A high cap combined with a price floor could also reduce volatility, thereby increasing utilities’ ability to leverage or leverage their assets. Investors may fear market intervention, but in these extreme conditions politicians have no choice but to act. Concerted, well-thought-out action doesn’t have to be bad at all.

Write to Rochelle Toplensky at

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