The European Commission presents the first ever European cap to curb excessive gas prices
Ursula von der Leyen presented the provision of the first ever European cap to curb soaring gas prices, but the measure will only apply in the event of extreme volatility and speculation.
The President of the European Commission also proposed to set up group purchases of gas and to establish rules of solidarity between the Member States to deal with possible shortages.
The proposed cap will act as an emergency tool and will be triggered when gas prices in European shopping centers exceed a certain threshold, yet to be defined.
The measure falls short of the forceful intervention advocated by some EU countries, including Italy, Greece, Poland and Belgium, which had called for a broader price cap on all gas imports and all gas transactions.
A more targeted price cap on gas used for power generation has also been excluded from the Commission’s new package, as the executive continues to examine the potential risks of the measure.
“We believe it is worth considering for introduction at EU level,” von der Leyen said, leaving the door open.
Here is an overview of the latest energy measures proposed by the European Commission.
A ceiling to tame speculation
Brussels intends to put in place a new mechanism to contain excessive volatility in the Dutch Securities Transfer Facility (TTF), Europe’s leading trading hub, and other similar platforms.
The TTF is a virtual market where suppliers and customers exchange gas supplies. Although not all companies use the TTF, its prices serve as the main benchmark for the entire energy sector in Europe.
Since Russia launched the invasion of Ukraine, the platform has seen sharp ups and downs gas prices, with uncertainties about the security of supplies fueling speculation.
In August, TTF reached a record price of €339 per megawatt hour, driving up electricity bills. After the peak, prices began a steady downward trend, hitting a three-month low in early October.
Monday firm at €128 per megawatt hour.
The proposed cap will act as a cap and effectively limit the maximum gas price at which the TTF is allowed to trade. It will be a dynamic cap, rather than a fixed one, and will mimic market trends.
The actual prince lineup is still pending and will be discussed between capitals in the coming days. Since the cap will only be triggered in situations of extreme volatility, the range should be wide.
In parallel, the European Commission plans to establish another cap to contain price spikes in energy derivatives, the financial assets that companies use to secure fuel supplies in the medium and long term.
“Having a price cap as a fallback in an emergency situation is a good way forward that can calm the market, because extreme volatility will no longer be tolerated,” said Simone Tagliapietra, principal researcher at Bruegel. Euronews in reaction to the announcement.
A new market, but just for LNG
The European Commission says the two caps will be a temporary solution while the EU works to build a new mall, separate from the TTF, which will be dedicated solely to liquefied natural gas (LNG).
Despite its high price, LNG has become the basic product to replace the Russian gas pipeline. Since January, the EU has been breaking records for LNG imports, mainly from the United States, as a period of economic slowdown in China unleashes international competition.
But this huge LNG surge has not been properly reflected at the TTF as this hub continues to be overly influenced by pipeline supplies and is therefore vulnerable to Russian manipulation.
A completely new benchmark will provide “fairer” and “more transparent” LNG prices, according to the Commission.
The goal is for the LNG hub to be operational by April. However, its success will depend on the reaction of market operators, who may reject or adopt the new platform.
Also by April, the Commission intends to put in place an appropriate system which will allow Member States to purchase gas as a single customer.
“We know we are strong when we act together,” von der Leyen said.
The idea of joint procurement has been touted since mid-2021, but has gained traction in recent weeks as countries rush to fill their underground floors and drive prices up.
The next filling season is expected to be tough and costly as the EU will no longer depend on the Russian gas pipeline. The Commission estimates that there is an ‘uncontracted’ gas demand gap of up to 100 billion cubic meters (bcm) – around 25% of what the EU was consuming before Russia started a war.
Joint procurement could help bridge the gap and ensure that all countries, regardless of their purchasing power, have access to gas supplies at affordable – or at least tolerable – prices.
Initially, Member States will be invited to pool their gas demand to identify their main needs and seek more attractive offers from international suppliers.
Then, on a voluntary basis, European companies will be authorized to form a consortium and buy gas collectively, in compliance with competition rules.
Russia will be excluded from the joint market.
At the same time, the European Commission will intensify bilateral negotiations with its main suppliers, such as the United States, Norway, Canada and Azerbaijan, to obtain lower tariffs.
In its latest package, the Commission urges Member States to sign so-called solidarity agreements among themselves. These agreements allow gas to cross borders from a country with sufficient gas to another with severe shortages.
To date, out of 40 possible solidarity agreements, only six have been signed.
The Commission is proposing default solidarity rules which will automatically apply in all cases where an agreement is not in place. Solidarity will be extended to ensure that essential gas-fired power plants continue to operate and to facilitate the distribution of LNG supplies across the bloc.
The rules will require neighboring states to respond to a request for assistance within 12 hours and deliver needed supplies within three days.
The assisted country will have to pay financial compensation based on average market prices.
In addition to these exceptional market instruments, the Commission proposes measures to provide increased financial support to companies facing liquidity problems.
EU state aid rules will be changed to ensure governments can inject the necessary funds into companies facing bankruptcy or insolvency.
The threshold for energy derivatives will be increased from €3 billion to €4 billion, while the list of eligible assets will be expanded to include non-cash collateral. This will ease the pressure on energy companies to secure expensive supplies in the medium to long term.
In particular, the Commission plans to transform almost 40 billion euros of cohesion funds, traditionally used to finance development projects in the poorest regions, into economic support to help vulnerable households and SMEs in difficulty.
The new energy package will be discussed by EU leaders at a two-day summit later this week and fleshed out by energy ministers on Tuesday.