EU members still fail to make headway on gas price cap proposal

EU members still fail to make headway on gas price cap proposal
The EU is attempting to put an oil price cap regime in place to deprive Russia of a significant proportion of the revenues it is currently receiving from oil sales around the globe. / bne IntelliNews
By bne IntelliNews October 10, 2022

EU leaders convened once more on October 7 to discuss the introduction of a price cap on gas imports, but once more, member states failed to decide on what form the measure would take.

Ahead of the summit, a majority of EU countries asked the European Commission to propose the gas prices. The energy ministers of 15 nations – Belgium, Croatia, France, Greece, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia and Spain – penned a letter to Brussels pledging support for the move. But the Commission itself has reservations about the price, fearing it could make the European gas market even more tight, as some suppliers will have an incentive to divert their shipments to other markets that offer higher prices, particularly in Asia.

Germany, Denmark and the Netherlands have likewise warned that the cap would make it difficult to buy gas on the global market. While Norway, which sends the overwhelming majority of its gas to Europe via pipeline, would have nowhere else to sell the volumes, LNG suppliers such as Qatar and the US could easily find other destinations for their gas. Russia, meanwhile, has warned before that it would cut off the remaining supply to Europe if a cap were imposed.

The European Federation of Energy Traders (EFET) is also concerned, warning on October 6 that a gas price cap could result in mandatory rationing of supplies.

“The gas price is currently being set by the demand side, not the supply side,” the federation said in a statement. “Prices rise to a level where consumers self-interrupt, switch to alternative fuels, or invest in other energy-saving measures.”

“Without market-based prices, consumption will rise and governments will have to step in to force reductions. And contracted and future gas deliveries into the bloc would be put at risk,” EFET added.

“LNG contracts in many cases take place outside EU jurisdiction (and indeed, sellers may insist that future contracts take place in international waters,” the federation said. “An importer could redirect cargoes outside Europe rather than trade at a loss against a lower cap. The consequence would be a risk to security of supply.”

The government in Berlin has suggested that governments step in to subsidise the wholesale gas, which would limit costs for households and industry, while ensuring suppliers still had an incentive to send gas to Europe. But this would come at a great expense to government coffers, at a time when many are contending with significant debt loads as a result of the pandemic and the fallout from the Ukraine-Russia conflict.

Meanwhile four countries – Poland, Greece, Italy and Belgium – have put forward an alternative proposal for a “dynamic price corridor” that would limit gas market volatility by preventing prices from rising or falling beyond a certain level. Under this proposal, some purchases would still be possible above the price ceiling.

The European Commission still has “significant work” to do on designing the gas price cap system, Irish Prime Minister Michael Martin said following the October 7 meeting. 

“Very significant work needs to be done by the European Commission ahead of the next Council” meeting on how to limit gas prices, he said. And a further six months are needed to work out proposals to reform the wholesale energy market and delink gas prices from power prices, he warned.

While continuing with internal discussions, the Commission is also reaching out to its suppliers to discuss the price cap. Norway’s government previously rejected the measure, but in late September Prime Minister Jonas Gahr Store said he was open to the idea, telling Politico that “no solution should be off the table.” However, he also said he was sceptical that the cap would achieve its aims, “because the danger of doing that is that you may limit supply.”

European Energy Commissioner Kadri Simon is due to visit Algeria on October 10-11 to hold talks on the cap there as well. 

European spot gas prices have fallen substantially since spiking at an all-time record in late August. The November contract at the Dutch TTF hub dropped to €144 per MWh ($1,490 per 1,000 cubic metres) during early trading on October 10, down nearly 8% from the previous session and over 40% down from the record high of €350 per MWh on August 26.

Despite further reductions in Russian gas supply, high prices have triggered reductions in European demand, causing those prices to fall. The drop on October 10 was supported by increased LNG imports and higher nuclear power output in France, which has experienced significant outages this year.