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EU leaders ask EC to study gas, power, CO2 markets amid energy crisis

Highlights

EU Council requests further work to assess 'trading behaviors'

Council urges use of EC's toolbox to address impacts on citizens, businesses

Energy ministers set to hold emergency meeting Oct 26

The European Council has asked the European Commission to study the gas, power and carbon markets to determine whether further action is needed to address a sharp rise in energy prices.

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The Council on Oct. 22 released the conclusions of its meeting of Oct. 21-22, with EU member states scrambling to find agreement on an overall position as Europe battles with surging energy costs and concerns over the impact on businesses and consumers.

"The European Council addressed the recent spike in energy prices and considered the impact of the price rises on citizens and businesses, especially our vulnerable citizens and SMEs, striving to recover from the COVID-19 pandemic," the Council said in its conclusions.

"The European Council invites the Commission to study the functioning of the gas and electricity markets, as well as the EU ETS market [EU Emissions Trading System], with the help of the European Securities and Markets Authority," it said.

"Subsequently, the Commission will assess whether certain trading behaviors require further regulatory action," the Council said.

Energy prices have surged in the second half of 2021, prompting concerns over jobs and growth in Europe as companies and households face rising costs.

Natural gas prices have more than doubled in less than four months, with Dutch TTF prices for calendar 2022 surging as high as Eur66.35/MWh Oct. 5, compared with Eur25.50/MWh on June 30, according to S&P Global Platts price data.

Similarly, EU carbon allowance prices rallied to an all-time high of Eur65.77/mt Sept. 28, although prices have subsequently eased back to trade in a range of Eur54.01/mt to Eur60.20/mt in the week ending Oct. 22. Higher natural gas and carbon prices have both contributed to rising power prices across Europe, raising costs for energy-intensive industries.

Poland has recently called for the EU's "Fit for 55" climate and energy package to be revised or postponed due to the energy crisis, while Czech Prime Minister Andrej Babis on Oct. 21 said he plans to call for curbs on carbon market speculation.

Toolbox of measures

The Council's comments follow the European Commission's proposed "toolbox" of measures released Oct. 13 which recommended actions that governments could take to address surging energy prices.

Those included income support measures, state aid and tax cuts, as well as a medium-term assessment of energy market design.

The European Council urged EU member states and the EC to "urgently make the best use of the toolbox" to provide short-term relief to companies and the most vulnerable consumers.

It also invited the EC to swiftly consider medium- and long-term measures that would contribute to energy at a price that is affordable for households and companies; increase the resilience of the EU's energy system and the internal energy market; and provide security of supply and support the transition to climate neutrality.

The Council also invited the European Investment Bank to look into how to speed up investment in the energy transition, with a view to "reducing future disruption risks."

Markets respond to fundamentals

While the impact of alleged speculation in the energy markets has grabbed much attention in recent weeks, fundamentals have played a large part in the current energy crunch in Europe.

European gas storage levels were left at unusually low levels after a colder than normal winter in 2020-2021, and this was compounded by rising competition for LNG from Asia.

Similarly, carbon prices have more than doubled from an average of just under Eur25/mt in 2020, in part because of measures which progressively reduce the net surplus of allowances available to market participants, as well as the EC's legislative proposals released in July which will further tighten the supply out to 2030, sending a strong signal to decarbonize the economy.

EU energy ministers are set to discuss surging power and gas prices at an emergency meeting on Oct. 26, with options including the use of carbon market revenues to counteract the rising costs of energy.

The revenue earned from EU carbon auctions from Jan. 1 to Oct. 22 stood at Eur24.3 billion, according to exchange data, compared with Eur18.9 billion in the whole of 2020.

However, ministers are split on the need for more structural change with Spain and France leading calls for a review of Europe's power market design that is based on marginal pricing.