Explainer-What Are the EU's Options to Curb Energy Bills?

What Are the EU's Options to Curb Energy Bills Amid Global Price Spikes?

By Kate Abnett

EU Response to Soaring Energy Prices

BRUSSELS, March 19 (Reuters) - European Union leaders on Thursday asked the European Commission to prepare temporary measures to curb energy prices, which have soared during the Iran war and piled pressure on already-struggling European industries.

Here's why prices are rising and the options the EU is exploring to try to contain them.

Fundamentals of the Energy Price Surge

FUNDAMENTALS

Global Supply Disruptions

Oil and gas prices move in response to changes in supply and demand. The U.S. and Israeli war on Iran has severely disrupted global supply, by forcing closures at major Middle East production sites, and preventing cargoes from passing through the Strait of Hormuz, which usually transits around 20% of the world's oil and gas.

Gas prices in Europe soared 25% and oil jumped by 10% during trading on Thursday, after Iran struck the world’s largest liquefied natural gas complex, causing damage that QatarEnergy CEO Saad al-Kaabi told Reuters meant a loss of around 17% of Qatar's LNG exports for upwards of three years.

Impact on European Markets

The EU's top oil and gas suppliers are the U.S. and Norway, and the bloc has not faced fuel shortages as a result of the Iran war. But it has been hit by rising prices caused by the global supply shock, and European buyers now have to compete on price with those in Asia for globally-traded LNG cargoes.

Even before Thursday, Europe's benchmark gas price had risen by more than 50% since the start of the conflict.

How Rising Prices Affect Energy Bills

HIT TO BILLS

Gas Prices and Electricity Costs

Gas prices are an important factor in determining overall energy bills in Europe.

That's because the EU's electricity market is designed so that the last power plant needed to meet demand sets the power price.

Cheaper sources like wind, solar and nuclear energy enter the market first. But often, a gas-fired power plant is needed too - particularly during peaks in power demand - which means gas-fired generation has a substantial impact on bills.

Short-Term Relief Measures

SHORT-TERM RELIEF

EU Toolbox for Temporary Measures

EU leaders asked the European Commission on Thursday to "present without delay a toolbox of targeted temporary measures" to address the energy price spike, in joint conclusions at a summit in Brussels.

Governments want to avoid a ⁠repeat of Europe's 2022 energy crunch, when prices hit record highs after Russia cut gas supplies. However, some concede they have limited levers to offset a price spike triggered by a major disruption in global markets.

Some EU diplomats also warn that the length of the Iran war will determine how much of an energy price crisis Europe faces - and suggest the EU should not trigger emergency measures now, in case they are needed later on to combat even worse price spikes.

National Government Actions

European Commission President Ursula von der Leyen on Thursday set out options the EU could use to curb bills.

Many focussed on actions national governments could take to shield people and industries from price rises by subsiding their energy bills, or reducing national taxes on fuel - which governments including Italy and Austria are already planning at the national level.

However, these measures are ultimately paid for by national budgets - and few governments can afford to maintain huge new subsidies for long.

EU-Level Interventions: Carbon Costs

CARBON COSTS

Adjusting the EU Carbon Market

Von der Leyen also suggested areas where the EU could step in, by tweaking the EU carbon market to try to curb the price of carbon permits.

The idea is that this would feed in to lower power prices.

The Role of the ETS

The ETS forces power plants and industries to buy permits to cover their CO2 emissions - a system that contributes 11% to industries' power bills across the EU, although in countries with fossil fuel-heavy power mixes it can be higher. The ETS comprises around 24% of industrial power prices in Poland, EU data show.

Debate Among EU Countries

Countries including Italy want the EU to suspend the ETS for power plants to cut this cost. Other countries, including the Netherlands and Sweden, say this would not substantially curb bills and risks dismantling the bloc's most effective climate change policy.

Long-Term Strategies for Energy Security

LONG-TERM PLAN

Transition to Renewables and Nuclear

In the longer term, the European Commission says its climate change strategy to replace fossil fuels with locally-produced renewable and nuclear energy will secure energy security, and cut countries free from ​volatile fuel prices.

(Reporting by Kate Abnett)