To cap or not to cap? EU mulls gas price intervention

The move could slow inflation, but bring unintended consequences
A Norwegian tanker transporting LNG in the Rotterdam port | Photo: Alamy

By Matej Banovec

Matej Banovec is a consultant for Dods EU Political Intelligence.

18 Oct 2022

As with the 2009 eurozone debt crisis and Covid pandemic, record high gas prices are once again testing the European Union’s ability to rapidly agree a common approach to a significant challenge. Member States have set about reducing their dependency on Russian fossil fuels and boosted gas stores ahead of winter.

In September, they agreed further measures, including an EU-wide reduction in energy consumption, a windfall tax on the fossil fuel sector and a cap on revenues for power producers operating below the sales margin. However, a push by 15 EU countries, including France, Italy and Spain, for a cap on the price of gas has proven more controversial.

While the initiative could lower energy costs and slow inflation, a similar measure in Spain and Portugal has shown it brings unintended consequences. Germany – the EU’s biggest gas buyer – and the Netherlands oppose a cap, arguing that it could drive up demand or make it harder for European countries to secure supplies. The European Commission has highlighted three problems with a price cap.

Security of supply

In a non-paper on an emergency wholesale price cap for natural gas published in late September, the Commission wrote, “Establishing the appropriate level for the cap would be a challenging exercise due to internal and global market dynamics and entail risks from the point of view of security of supply.” Energy Commissioner Kadri Simson has indicated she is more open to a price cap on Russian gas only, a move that would avoid potentially upsetting likeminded suppliers like Norway and the United States. The Commission has also warned that if global gas prices rise above the cap, attracting gas to the EU would be very costly.

Encouraging consumption

A price cap would remove the financial incentive for consumers to reduce consumption, thereby requiring more drastic measures to encourage Europeans to use less gas. The Iberian gas price cap instituted in Spain and Portugal was followed by an increase in gas consumption. Germany’s federal network authority recently warned that the country – which opposes a cap and is heavily reliant on Russian supplies – is already using too much gas after data showed household consumption was recently 10 per cent above the multi-year average and industrial consumption was just two per cent lower.

Maintaining cross-border gas flows

If gas becomes scarcer, experts fear there is a risk that a cap could lead some countries to hoard supplies and reduce the cross-border flows that some states depend on. “When Europe introduces a price cap, markets will stop functioning and cross-border trade will cease,” Lion Hirth, a professor of energy policy at The Hertie School, wrote in a LinkedIn post. The Commission has said a uniform gas price set by the EU would interfere with intra-bloc trading and require a central authority to determine gas flows. Russia has said it will not sell gas to countries or regions that implement a maximum price.

What next?

In a speech to the European Parliament on 5 October, Commission President Ursula von der Leyen described a gas price cap as, “a temporary solution until we will have a new EU price index developed that ensures a better functioning of the market.”

The Commission has backed an alternative price benchmark for liquified natural gas (LNG), currently sourced on global markets at a premium, to complement the existing Amsterdam-based Title Transfer Facility (TTF) index. Due to Russian manipulation and price-gouging, TTF has spiked far beyond the comparable Asian index and helped fuel inflation in Europe.

Two days later, von der Leyen wrote to European leaders with an eye on their summit on 20-21 October outlining two possible temporary price caps: one on imported gas to “demonstrate that the EU is not ready to pay whatever price,” and another on gas used to generate electricity “in anticipation of a structural reform of the electricity market”. In both cases, she said mandatory gas saving schemes would be needed to assuage concerns about increasing overall gas usage. Energy experts have nevertheless raised concerns about preventing the overconsumption of gas and the curtailments this would lead to.

Greece, Italy, Poland and Belgium have put forward an alternative joint proposal to fix the price of all EU wholesale gas imports with added flexibility. Their mechanism would provide Member States with leeway to negotiate with suppliers by paying prices up to five per cent above the cap, producing a so-called price corridor to help guide gas to regions that need it most. To tackle any risk to gas supplies, their plan includes an option for purchases from global markets at uncapped prices. Some experts remain concerned that this proposal could put the EU at risk of a shortage.

Discussions are ongoing ahead of the European Council summit. In her letter, von der Leyen wrote that Member States needed to preserve a level playing field, without distortions of the single market. “To avoid serious fragmentation, we need a united and common European response,” she warned.

Read the most recent articles written by Matej Banovec - REPORT: Conference on the Future of Europe. The citizens have spoken. Can the EU answer?


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