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Gas price brake, gas price cap, oil price cap: the perspective in the energy policy confusion

2023-01-24T06:32:19.088Z


The price brakes and price caps that have recently come into force for electricity, oil and gas are intended to protect companies and consumers. An overview of the most important measures - and how well they work


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A worker in the Siempelkamp Giesserei in Krefeld:

Particularly energy-intensive industries are suffering from the massive cost increases - the price brakes are intended to relieve them

Photo: Sascha Schuermann / Getty Images

Since the Ukraine war, the prices for electricity, gas and oil have exploded and in the meantime have reached historic highs.

The high energy prices are considered an important driver of inflation, which was 7.9 percent in Germany in 2022.

The federal government and its European neighbors have therefore agreed on a whole range of relief for companies and consumers as well as sanctions against Russia in the past few months.

The overview describes the most important measures and clarifies how well they work.

The gas price brake:

The concept:

With a so-called price brake, the federal government wants to relieve households and companies from the sharp rise in gas prices.

It is a national instrument, so it only applies in Germany.

The idea: the federal government pays part of the gas price.

The implementation:

Citizens and small and medium-sized companies pay a maximum of 12 cents per kilowatt hour gross for 80 percent of the forecast gas consumption (for district heating 9.5 cents per kilowatt hour).

As a rule, the amount is based on the previous year's consumption.

The state bears the difference between the market price and the amount of the price brake.

In concrete terms, the whole thing works in such a way that the state pays the energy suppliers such as RWE the sum.

These, in turn, are obliged to credit their customers with the amount – either with the statement or via the advance and installment payments.

The market price applies to the remaining 20 percent of the gas consumed, so that companies and consumers have an incentive to continue saving energy.

The relief applies from March 2023, but also applies retrospectively to January and February 2023. Industrial customers pay a maximum of 7 cents per kilowatt hour for gas for 70 percent of natural gas consumption in 2021 (heat consumption: 7.5 cents per kilowatt hour).

Gas suppliers and self-procuring companies have been able to apply for quarterly advance payments via an online platform since the beginning of the year.

The effect:

In energy-intensive industries such as steel, metal processing or chemicals, the gas price brake is only intended to fulfill its purpose to a limited extent.

Affected companies complain that the requirements of the measure make it almost impossible for them to take advantage of the aid.

Whether companies get the relief depends, among other things, on their economic situation in 2023 as a whole, for example the decline in profits.

But that is exactly where the central problem lies, they say.

In view of the looming recession, many feel unable to make a reliable forecast.

As a result, many companies are doing without a bureaucratic application and are not initially planning to use the aid for 2023.

As far as consumers are concerned, they will hardly feel the relief in the long term – provided the wholesale gas price remains at the level of 70 to 80 euros per megawatt hour, which has now fallen significantly again.

As experts explain, the consumer price would then fall to a level of around 12 cents anyway.

So it won't be cheaper in this case.

The electricity price brake:

The concept:

It is also a German instrument to cushion the increase in costs.

Analogously to the gas price brake, the federal government has decided to relieve private households and small companies when it comes to electricity.

The implementation:

For 80 percent of the previous year's consumption, they should have to pay a maximum of 40 cents per kilowatt hour gross.

The more electricity, gas and district heating they save, the more help there is.

So if you consume less than 80 percent, you will also receive more support, explains the Federal Association of Consumer Centers.

The instrument has been in effect since January 2023, but electricity suppliers will only pay out the relief amounts for January and February in March.

For medium-sized and large companies with more than 30,000 kilowatt hours of annual consumption, the government caps the electricity price at 13 cents (net working price) for 70 percent of the previous year's consumption.

The relief is also financed by a temporary random profit tax for electricity producers and companies in the oil, coal and refinery sectors.

The effect:

Experts assume that despite the gas and electricity price brakes, significantly more consumers will default in payment.

Because even with the price brakes, they sometimes pay twice as high gas or electricity bills as before the crisis.

The consulting firm Oliver Wyman therefore forecasts payment defaults of 5 to 10 percent of sales for municipal utilities.

The association of municipal companies (VKU) warns that this, in turn, could put the public utilities in liquidity difficulties or even consume their equity.

The gas price cap:

The concept:

In order to control the strongly fluctuating gas price, the EU has agreed on a European gas price cap for wholesale purchases.

It therefore affects major customers and not end consumers, such as the German gas price brake.

The implementation

: Under certain conditions, the gas price at the TTF trading venue should not be allowed to exceed a maximum price of 180 euros per megawatt hour.

In August, the TTF price reached a record high of over 340 euros per megawatt hour, but most recently it has been around 62 euros per megawatt hour again.

The EU wants to enforce this fixed maximum price against suppliers by having the member states pool their market power and buy gas together.

In the event of impending bottlenecks or other problems, the price cap can be lifted again.

The mechanism will attack from February 15, 2023.

The effect:

Even before the EU countries had agreed on the gas price cap, there was plenty of criticism of the instrument.

Germany in particular had long resisted such a market intervention.

Political and business representatives feared that suppliers would be more likely to sell their gas to Asian markets instead of to the EU, where they could achieve higher prices.

Critics say that if gas becomes scarce, this could put Europe to the test in the struggle for distribution.

In order to prevent overbidding with Asia, the EU decision now contains various security mechanisms that ultimately allowed Germany to agree to the compromise.

However, some experts doubt that they will be sufficient and continue to warn of supply gaps.

According to Goldman Sachs analysts, a price cap without a simultaneous cap on demand harbors the risk that the European gas supply deficit will widen.

Chancellor

Olaf Scholz

(64, SPD), however, apparently hopes that the price cap of 180 euros will be so high that it will not even come into play.

The oil price cap:

The concept:

In the course of the EU's oil embargo against Russia, the G7 states, the EU members and Australia agreed on an oil price cap for Russian oil.

Unlike the German price brakes or the European gas price cap, it is an external measure - as a further sanction against Russia.

Implementation:

Since December 5, the EU has been boycotting the import of Russian crude oil by sea.

So that Russia cannot sell its oil at high prices to other countries in the world, companies based in the countries mentioned may only trade, ship or finance or insure its transport if the oil sells to third countries below a price of 60 dollars per barrel will.

The background is that Russia has so far been heavily dependent on Western services.

With shipping insurance alone, the G7 countries cover around 95 percent of the global oil tanker fleet.

From February, Kremlin boss

Vladimir Putin

(70) will ban Russia's oil exports to countries that apply a corresponding price cap.

The effect:

After a lot of initial criticism, voices about the success of the oil price cap currently predominate.

According to the Finnish research institute CREA, the measure hits the Russian economy hard: The oil price cap means that Russia is losing 160 million euros a day, according to the researchers, according to Bloomberg.

This amount could increase to around 260 million euros from February 5 if the oil price cap is extended to oil products such as heating oil, diesel or petrol.

So the Kremlin's revenues are falling;

Russia's budget deficit rose to a record high in December.

According to the CSIS think tank, the price cap has already achieved one of its main goals: push through strong discounts for Russian oil – at least for Russia's most important type of crude oil, the Urals, which Russia typically exports to Europe.

This traded at around $40 a barrel for most of January, according to Argus Media.

That is almost half the price of the North Sea variety Brent.

But: India, China and Turkey - important buyers of Russian crude oil - have not joined the western price cap.

Russia's ESPO oil blend, which traditionally buys from Asia, was recently sold above $60 a barrel.

What also thwarts the effect of the price cap is that Russia is buying up many old oil tankers in order to ship the raw material on its own, without Western services.

Source: spiegel

All news articles on 2023-01-24

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