Multi-criteria assessment of short term energy crisis response measures in Europe.

1. Dominic Scott
Senior Advisor
dscott@raponline.org
Rue de la Science 23
B-1040 Brussels
Belgium
Bram Claeys
Senior Advisor
bclaeys@raponline.org
September 2022
To inform European discussions
Assessment of wide range of
emergency policy measures
to address the energy crisis

2. 1 Key messages
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3. Regulatory Assistance Project (RAP)®
• Redouble efforts on demand reduction. Demand-side reduction is essential to lower
prices and has positive spillovers – this may include (peak) demand reduction auctions.
• Provide targeted financial support, as opposed to general subsidies. Social security
systems should be bolstered, and complemented by financial support for vulnerable
consumers. Inclining block tariffs or generic rebates will also help but are untargeted and
expensive.
• Windfall taxes may provide a useful source of revenue for welfare redistribution.
The European Commission’s (EC’s) infra-marginal rent capture proposal may offer
another avenue – subject to feasibility.
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Key messages (1)

4. Regulatory Assistance Project (RAP)®
• Price signals are needed to avoid rationing. Retail price caps –masking true costs of
consumption – should be resisted, because:
• They impede required demand reductions thus enhancing wholesale prices and costs.
• They lead to blackouts unless additional demand reduction measures are enacted.
• These additional measures in turn reduce prices, and render the price cap redundant.
• Gas procurement strategies come with challenges. Interventions that reduce the cost
of procuring gas (group purchase, smart entry tariff or price cap on pipeline gas) have
merit. But it is a challenge to implement them in a way that has the desired effect:
• To save consumers money, the strategy should reduce gas purchase prices.
• Retailers’ cost savings from lower purchase prices should be shared with consumers.
• Reduced purchase price should not prompt a reduction in supply, to protect security.
• The price for an extra unit of energy should not be dampened – to avoid stimulating
consumer demand and blackouts, noting supplies are limited.
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Key messages (2)

5. 2 Introduction
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6. Regulatory Assistance Project (RAP)®
• The EU Commission (EC) and Council discuss additional tools to support families and
businesses through this coming winter and the next few.
• RAP compared in this high-level assessment a broad array of options, across various
dimensions. These include measures featured in EC proposed regulations on
emergency interventions to address high prices, as well as other measures in the public
domain.
• We focus on short term measures, and distinguish measures based on
• Focus:
• broad vs. targeted.
• Energy carrier:
• gas or electricity.
• Impact area:
• wholesale vs. retail,
• direct consumer support vs. revenue-generating.
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Introduction

7. Regulatory Assistance Project (RAP)®
7
Tools
to
help
consumers
directly
Group purchase of gas An EU energy purchase platform intended to leverage the bloc’s economic clout. See Bruegel.
General wholesale gas price cap A price cap applied for all wholesale gas procured across Europe. See Lion Hirth.
Pipeline gas price cap A price cap on pipeline gas + monopsony LNG purchase + subsidised by regulated charge. See FSR.
Russian gas price cap A price cap for gas volumes of Russian origin. See ZBW.
Pipeline gas entry tariff A gas entry tariff is applied to pipeline gas, designed to incentivise offers at European estimates of justifiable costs of production. See REKK.
Retail price cap (gas/electricity) Retail price cap, as applied for example in Britain.
Price shock absorber (electricity) Wholesale market cap with automatic trigger and deactivation, justified costs of necessary generation above cap are remunerated. See RAP.
Iberian gas cap (electricity) Wholesale market cap set in law for a given period, justified costs of generation above cap are remunerated. See ICIS analysis.
Targeted rebates (retail: gas/electricity) Lump-sum vouchers for most vulnerable consumers to reduce bills, for example the Fuel Allowance as cited in Ireland by ESRI.
Social tariff (retail price cap (gas/electricity) for
targeted vulnerable consumers)
Tariffs offering energy at a price discount to targeted vulnerable consumers, requiring funding. See for example Belgium in Bruegel analysis.
Inclining block tariffs (basic service) These offer blocks of energy to consumers in tranches that increase in price with volume consumed. See FSR seminar.
Generic rebates (for all users) Voucher or lump-sum bill support to reduce cost of meeting energy bills. See for example electricity credit in Ireland.
Dynamic retail tariff Clean Energy for All Europeans Package requires suppliers with 200,000+ customers to offer a dynamic tariff. See Article 11 of Electricity Directive.
Demand reduction auctions Auctions to stabilise energy systems by offering demand reductions. See for example Germany.
Push existing renewables (RES) + nuclear on to
2-sided contracts for difference (CfDs)
Pushing certain legacy generation technologies on to subsidy contracts that fix the rent they earn. See LCC.
Liquidity support Governments providing power companies with credit guarantees to secure their ability to participate in trade. See Finland and Sweden.
Nationalisation of utilities Purchase of utilities by the state, most recent example is Uniper.
Measures
that
raise
revenues
Electricity generation windfall tax
(incl. RES, nuclear, + gas generation)
A one-off corporate tax on targeted electricity generation companies. See Timera blog.
Fossil fuel windfall tax A one-off corporate tax on European fossil fuel companies, including refinery. See IMF.
Tariff on Russian gas A tariff applied to imports of Russian gas. See for example Daniel Gros analysis.
EC infra-marginal rent capture (electricity) A proposal of the European Commission to capture rents of infra-marginal plant. See EC press release.
Crisis measures overview

8. Regulatory Assistance Project (RAP)® 8
Rating criteria
Feasibility
Consumer
impacts
European
cohesion
Climate
coherence
Hard to effect at speed;
significant barriers at
political, regulatory or
practical level.
Relatively feasible in
short time frame.
Feasibility less than
desired.
Drawbacks and risks –
such as cost, blackout
risk – are significant
compared to merits.
Net welfare benefits to
consumers, including
energy reliability and
equity.
Consumer impacts less
positive than desired.
Fragmented approach
across MSs that impede
efficiencies of single
market and lead to
autarky.
Aligned approach across
Europe preserves
integrity of single
market.
Less cohesion than
desired.
At odds with the speedy
transition away from
fossil gas and fuels.
Consumption of fossil
fuels (gas in particular) is
reduced.
Less climate protection
than desired.

9. 3 Assessment
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10. Regulatory Assistance Project (RAP)® 10
Crisis measure scores show diverging value
Behavioural demand campaigns
EC electricity rent capture
Liquidity support
Gas electricity price cap (Iberia)
Electricity price shock absorber
Push 2-sided electricity contracts for
difference for existing RES/nuclear
Generic rebates
Inclining block tariffs
Demand reduction auctions
Retail price cap (gas/elec.)
Pipeline gas entry tariff
Russian gas price cap
Pipeline gas price cap
General gas price cap
Group purchase gas
Tariff on Russian gas
Fossil fuel windfall tax
Electricity generation windfall tax
Social tariff
Targeted rebates
Welfare redistribution Market disruptive
Market conform
Nationalisation of utilities
10
In EU package
W
h
o
l
e
s
a
l
e
R
e
t
a
i
l
Dynamic retail tariff

11. Regulatory Assistance Project (RAP)® 11
Focus on wholesale measures
Liquidity support
Gas electricity price cap (Iberia)
Electricity price shock absorber
Push 2-sided electricity contracts for difference for existing RES/nuclear
Pipeline gas entry tariff
Russian gas price cap
Pipeline gas price cap
General gas price cap
Group purchase gas
Tools to lower
consumer cost
- Wholesale
Nationalisation of utilities
Positive consumer impact
Implementation
feasibility
In EU package Impacts gas sector Impacts electricity sector

12. Regulatory Assistance Project (RAP)®
12
Assessment – wholesale measures
Option Feasibility Consumer impact European cohesion Climate coherence
Group purchase of gas,
(see Bruegel)
Requires willingness to
collaborate between MSs, e.g.,
needs agreement on how to
share the gas and what price to
offer. Proven to be challenging.
Might generate some savings.
Must manage risk that if supply is limited,
reduced prices may require rationing gas
with service interruptions.
No market distortion. See Bruegel
for example exploring how it may be
achieved.
Cheaper gas – risks slowing
down process of getting off gas.
Wholesale gas price cap Unclear how to prevent being
outbid by other buyers (Japan,
Korea).
If not enough LNG attracted, then risks of
blackouts. If government covers the
difference between cap and market, big
budgetary impact.
MSs may try to hoard gas to avoid
blackouts.
Cheaper gas – risks slowing
down process of getting off gas.
Pipeline gas price cap
(see FSR)
Unclear, but likely not straight
forward.
Given supply is limited, it is unclear if cost
savings from intervention accrue to retailers
or to consumers. If latter, through reduced
prices, this might impede demand reduction
and thereby lead to rationing.
MSs may try to hoard gas to avoid
blackouts.
Cheaper gas – risks slowing
down process of getting off gas.
Russian gas price cap Politically sensitive due to it
being considered a sanction and
requiring unanimity.
Probably limited consumer savings. Unclear
however how to share retailer’s reduced
gas procurement costs with consumers
without shielding consumers from marginal
cost of procuring LNG, which would
enhance demand, and risk of blackouts.
Uncertainty about Russian reaction.
Can be determined at European
level.
Cheaper gas could risk slowing
down process of getting off gas.
Pipeline gas entry tariff
(see REKK)
Uses existing instrument (import
levy), but mechanics likely not
straight forward.
Price shock absorber,
electricity
(see RAP)
Complex. Automatic deactivation
feature once implemented,
making it future-proof.
Results in price reduction, partly offset by
need to recover cost of gas compensation.
Lower price may lead to shortages through
increased (gas) demand.
Leakage risk at borders, especially
when not implemented uniformly.
Can include incentive for hedging.
Risk of gas hoarding by MSs if
intervention stimulates gas demand.
Supports electrification.
Can stimulate demand for gas
generation in electricity.
Iberian gas cap, electricity Complex. Activation and
deactivation is political decision.
Push existing RES+nuclear
on to 2-sided CfDs
Complex and requires strong
motivator to get operators to
enter CfDs.
Lowers costs for consumers, but effect may
be modest (misses gas fired generators
making big profits).
Should not be distorted. Minimal risk of slowing down
RES investment if applied to
legacy plant.
Nationalisation of utilities Very complex and difficult. Permanent loss of benefits of competition. Enhanced risk of cross-subsidy. Need not harm decarbonisation.

13. Regulatory Assistance Project (RAP)® 13
Focus on retail measures
Behavioural demand campaigns
Generic rebates
Inclining block tariffs
Demand reduction auctions
Retail price cap
Social tariff
Targeted rebates
Tools to lower
consumer cost
- Retail
Implementation
feasibility
Positive consumer impact
13
In EU package Impacts gas sector Impacts electricity sector
Dynamic retail tariff

14. Regulatory Assistance Project (RAP)® 14
Assessment – retail measures
Option Feasibility Consumer impact European cohesion Climate coherence
Retail price cap
(gas/electricity)
Relatively straightforward.
Foresee potential resulting
increased reliance on Supplier of
Last Resort.
Provides price shock relief for
all. But not targeted at most
vulnerable / low-income
households. Impedes demand
reduction, thus inflates
prices for all and enhances
black out risk. A last resort.
Negative spillovers across
Europe and beyond.
Encourages consumption of
gas/electricity.
Targeted rebates
at most vulnerable
(retail: gas/electricity)
Challenging. Depends on data
availability, and requires
government funding to retailers.
Helps vulnerable consumers in
targeted manner and without
distorting incentives.
Does not distort single market. Efficiency incentive remains.
Structural investment in
efficiency should be pursued.
Social tariff
retail price cap
(gas/electricity) for low-
income households.
Selection of target group will be
challenging. Requires cost
recovery for retailers.
Effective cost mitigation
measure for those on tariff.
Equity concerns for target
group selection.
Does not distort single market. Impact of cheaper gas in
slowing down energy
transition is likely modest.
Inclining block tariffs Politically difficult discussion
about definition of basic service
levels and following blocks and
cost redistribution. Requires
retailer cooperation.
Benefits all consumers
including low-income and
vulnerable consumers. But
untargeted and costly.
Does not distort single market. Possibly limited impact on
decarbonisation. Keeps
efficiency incentive.
Generic rebates
for all users
(gas/ electricity)
Dynamic retail tariff
offered in electricity (as
required of big suppliers
in Clean Energy Package)
Redouble efforts to comply with
obligations to have dynamic
offers. Consider making default.
More responsive demand
reduces prices, benefitting all
consumers. But benefits more
affluent with flexible assets.
Positive spillovers. Supports decarbonisation.
Demand reduction
auctions
Challenging. Examples of
emergency auctions exist. Need
to remunerate those that reduce
demand.
Positive spillovers across
borders and into electricity.
Disproportionally benefits
those that can reduce demand.
Positive spillovers Supports decarbonisation, can
include incentive for demand
side flexibility.

15. Regulatory Assistance Project (RAP)® 15
Focus on revenue generation
Electricity infra-marginal rent capture
Tariff on Russian gas
Fossil fuel windfall tax
Electricity generation windfall tax
Measures to
generate
(government)
revenue
Potential size of revenue
15
In EU package Impacts fossil gas Impacts electricity Impacts oil Impacts coal/lignite
Implementation
feasibility

16. Regulatory Assistance Project (RAP)® 16
Assessment – measures that raise revenue
Option Feasibility Consumer impact European cohesion Climate coherence
Electricity generation
windfall tax
(incl. RES, nuclear, +
gas generation)
Uses existing instrument:
corporate taxation. Risk of
protracted legal wrangling
and tax evasion.
One-off lump-sum tax. Fair, as
taxes based on actual net
profits (incl. gas). Raises
revenue that can be directed
at social support and demand
reduction.
Risk of distortion by MS-
level implementation, and
requires agreement on
sharing revenue among
MSs.
Helpful if revenue used to
support structural investment in
efficiency and decentralised
renewables. But ex post
intervention may damage RES
investor confidence.
Fossil fuel windfall
tax
Uses existing instrument:
corporate taxation. Legal
wrangling. Problem of
how to capture profits
from companies based
outside EU.
One-off lump-sum tax. Fair, as
taxes based on actual net
profits (incl. gas) but risk of
inability to capture extra-EU
companies. Raises revenue
that can be directed at social
support and demand
reduction.
Risk of distortion by MS-
level implementation, and
requires agreement on
sharing revenue among
MSs.
Helpful if revenue used to
support structural investment in
efficiency and decentralised
renewables.
Tariff on Russian gas Politically unattractive -
will likely increase prices.
Prices gradually increase.
Raises revenues that can be
directed to support low-
income and vulnerable
households.
Tariff can be determined
at European level.
Supports fuel switching away
from (RU) gas. Risk in long run is
that Russia opens gas taps,
lowering prices again.
EC infra-marginal
rent capture in
electricity market
Challenging to implement,
needs visibility into
futures and bilateral
contracts. May be
challenged as tax.
Rents are transferred to
consumers for social support
or efficiency/renewables.
Uniform price cap across
EU protects single market.
Good for electrification, but gas
(and coal?) fired generation
escapes proportional
contribution.

17. 4 Insights
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7

18. Regulatory Assistance Project (RAP)®
• Most promising are tools to lower consumer costs at retail level through demand reduction or targeted
rebates. There is no one silver bullet. A tailored combination considering the existing situation and
systems will be needed.
• Avoid tools that mask the true cost of consumption, like broad retail price caps.
• While providing relief, they do not target vulnerable/low-income households and impede
demand reduction, thus inflating prices and costs, enhancing blackout risk.
• This necessitates additional demand reduction measures, which in turn render the price cap
redundant.
• Corporate windfall taxes may hold the most promise for generating revenue. The EC’s electricity
infra-marginal rent capture mechanism needs a feasibility assessment.
• Tools to lower consumer cost at the wholesale level are less promising generally, nevertheless, of
relative merit are
• Liquidity support, taking care to distinguish between insolvent and illiquid firms.
• Group purchase of gas, which might help reduce prices.
• Pipeline gas entry tariff or price cap, which may present the challenge of ensuring the cost
reduction for retailers is shared with consumers.
• Moving existing renewables & nuclear to 2-sided CfDs, which will take time.
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Tailored mix of support and revenue

19. Regulatory Assistance Project (RAP)®
• Responses to fossil gas price volatility
• Price shock absorber: Temporary price relief in crisis
• EU can stop Russian gas imports by 2025
• Getting off the fossil fuel roller coaster
• The joy of flex: Household demand-side flexibility
• The clash with gas: Should it stay or should it go?
• RAP power system blueprint 2035
19
Related RAP resources

20. About RAP
The Regulatory Assistance Project (RAP)® is an
independent, non-partisan, non-governmental
organization dedicated to accelerating the transition
to a clean, reliable, and efficient energy future.
Learn more about our work at raponline.org
Dominic Scott
Senior Advisor
dscott@raponline.org
Bram Claeys
Senior Advisor
bclaeys@raponline.org
@bramcla