Winter cuts: businesses to bid for compensation to reduce electricity

Maltese businesses could have to “bid for compensation” to fulfil targets for a national reduction in electricity consumption in winter, under a proposed regulation from the European Commission.

Brussels wants to tackle the high price of energy by reducing demand as it fears a shutdown of Russian gas that will leave European consumers exposed to a harsher winter.

But its response to target the most expensive hours of electricity consumption – reducing it by at least 5% during selected peak price hours – could also have a disproportionate impact on Maltese businesses according to government experts.

The EC wants to push through an obligation for member states to reduce electricity consumption by at least 5% during selected peak price hours. Malta will be required to identify the 10% of hours with the highest expected price, and then reduce demand during those peak hours.

The period will extend from 1 December 2022 to 31 March 2023, which means the 5% consumption reduction would take place over an average of 2.5 hours a day.

However, businesses who will reduce consumption during the peak hours will also be compensated for loss of business, through an open competitive process – tenders – where consumers bid for compensation for having reduced their consumption. The cheapest compensation requested will win the bid.

According to government experts analysing the Commission proposal, the demands could be more onerous for the Maltese: the amount of electricity that must be reduced is 10% over the average baseline of of five winters, from 2017 onwards.

But Malta’s historic date, which includes the COVID period where there was already a reduction in consumption – particularly due to the lack of mass tourism in 2020 – has drawn the average demand lower.

That would mean Brussels’s measure inflicts a further reduction over an already low baseline, which for large businesses like hotels or manufacturing plants could also inflict job losses from lower productivity.

Malta’s energy system is powered by liquefied natural gas, but is converted into electricity and has no distribution system for heating via pipes in winter. Winter peak hours occur in the evenings when demand for heating grows, meaning reducing energy consumption inside government offices throughout the day will not have a big enough impact.

Instead it is likely that it will be left to certain industries and large businesses to reduce their operations in order to make up for the overall national reduction.

If winter peak consumption reaches 450MW, the 10% cut could be equivalent to the capacity required by around three medium-sized hotels or one large manufacturing facility, that would have to stop operations for at least 2.5 hours a day.

Cap on LNG price

Malta is now pushing for a general cap on the wholesale price of natural gas, along with Italy, Greece, Belgium and Poland.

If successful, this could lead to a reduction in price of LNG, which would in turn impact prices of energy Malta sources from its interconnector to Italy.

But the Commission is still studying the pros and cons of the gas cap and will not put forward any legislative proposal until the internal assessment is completed.

The idea of introducing an EU-wide price cap on all gas imports, beyond Russia, gained traction after August saw record-breaking prices in trading and pushed electricity bills to unsustainable highs.

Critics however think a price cap on gas will alienate shippers of LNG, who will instead re-route the commodity to other markets.

The EU is already attempting to source LNG purchases from other parts of the world to compensate for the loss of Russian pipeline gas. But gas prices have been hovering at around €200 per megawatt-hour – six times the price in 2021.

Gas is the most expensive fuel, and it also sets the final price of electricity. A price cap on gas imports would artificially contain the price of electricity bills by forcing suppliers to effectively turn a smaller profit. But as demand for new gas markets ramps up, suppliers might not be too enthusiastic about such price caps.

Brussels plan

The Commission’s plan is to reduce electricity consumption for households, companies, factories and public buildings. The EU-wide plan would introduce a mandatory target to cut demand by at least 5% during peak hours. In practice, this would affect between three to four hours per weekday, the Commission estimates.

Peak hours refer to the time of the day when demand intensifies and prices reach their highest levels, particularly due to the influence of gas-powered plants.

Countries will be allowed to identify their own peak hours, which usually take place between 7 am to 10 pm, and design their own measures to encourage the reduction.

In addition to this, a voluntary target would ask countries to slash overall electricity demand – combining both peak and off-peak hours – by at least 10% by the end of March.

The Commission believes record-high bills are already pushing consumers to cut down on their power use and the EU-plan would serve to reinforce the ongoing trend.