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    From the Editor: Europe’s bungled gas price cap plan [Gas in Transition]


The proposal, as it currently is, is symbolic. But the EU must also question whether a price cap would really be desirable. [Gas in Transition, Volume 2, Issue 11]

by: NGW

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From the Editor: Europe’s bungled gas price cap plan [Gas in Transition]

For months, EU leaders have been negotiating the introduction of some sort of price cap on wholesale gas prices, to shield its energy industry and consumers from the pain of soaring energy bills. And for months, there has been limited progress.

Some member states are against the idea entirely. Others believe it should be subsidised by governments, rather than imposed directly on suppliers, fearing the impact it will have on how much gas enters the continent, and there are also fears it could undermine the incentive that high prices have created for energy users to cut how much gas they consume.

The European Commission finally came forward with a proposal on November 22, to cap the month-ahead gas price at the Dutch TTF hub at €275/MWh, or close to $3,000/’000 m3. But the caveat is that the cap will only be triggered if this price level is breached for two consecutive weeks.

That has not happened yet in the European market this year. Even when the TTF front-month price spiked in late August, at an all-time record of €350/MWh on August 26, the proposed price ceiling would not have been triggered, as the two-week average was far below €275/MWh. And there is a second requirement for the cap to be imposed – the spread between the TTF exchange price and the global LNG price must exceed €58 for 10 consecutive trading days within those two weeks.

"Gas prices in the EU have fallen since August thanks to demand reduction, mandatory storage filling, diversification of supplies and other measures proposed by the commission in recent months," EU energy commissioner Kadri Simson said in a statement. "But we have been missing in our toolkit a way to prevent and address episodes of excessively high prices."

"Today, we propose to put a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes," she continued. "The mechanism is carefully designed to be effective, while not jeopardising our security of supply, the functioning of EU energy markets and financial stability."

Experts were quick to raise eyebrows about the proposed cap.

The proposal is a "curious one," Javier Blas, an energy market columnist at Bloomberg, commented in a tweet, noting that at no point in 2022, despite record-high prices, would the cap mechanism have been triggered.

"We now have a cap that doesn't cap," he said. "A Brussels cap."

"Much ado about nothing," Anne-Sophie Corbeau, energy expert at Columbia University's School of International and Public Affairs, told NGW.

"The EC has been saying that prices have been too high especially in August and have come up with a measure that would not have prevented that episode from happening," she said. "They had to propose something, so they came up with something that will not change anything, maybe in the hope that it would secure consensus from member states."

"They pretend to do something while doing nothing."

Thierry Bros, another energy expert at Po Paris, warned, though, that the proposed cap could be negotiated downwards during discussions among member state energy ministers. A meeting of those ministers took place on November 24, and it was seemingly roundly rejected as toothless.

The commission put forward the proposal after coming under heavy criticism from a group of 15 member states – and that same group is now slamming the high price of the cap as pointless. The group includes Belgium, Poland, Greece and Italy, while another bloc comprising Germany, Austria, Denmark and the Netherlands, is against the idea altogether, fearing that it could drive off new supply.

“Right now, nobody’s happy,” one EU diplomat told Politico. “We’re not progressing … [and] back to where we were at the beginning.”

Others have vented frustration at how the commission has handled the process.

“How fucked up can you be and how bad can you handle all this,” one diplomat told the news agency.

“It’s clear that the commission took sides with the Netherlands and Germany,” another diplomat said, adding that the price ceiling had been set “at a level where it’ll never be implemented.”

Some of the criticism has been on the record.

Spanish ecological transition minister Teresa Ribera described the commission's proposal as a "joke," saying it would cause steeper price hikes and undermine efforts to quell inflation. Most EU member states are against the idea, she added. Spain could withdraw support for other proposals if the commission does not take a "serious" look at the plan, Ribera said.

Meanwhile, the French energy transition ministry has described the cap proposal as "insufficient," warning that it "does not respond to the reality of the market."

With winter fast approaching, it seems increasingly doubtful that the EU will be able to agree a gas price cap that is effective and feasible. And there are legitimate concerns about whether such a plan is even desirable. Russian gas supply has steadily fallen over the summer and autumn, and hit an all-time record low of 2.1bn m3 in October, 5.6% below the previous record low in September.

Regardless, Europe has been able to avoid blackouts and heating outages, in part through reductions in demand, some of them highly destructive, but also increased LNG supply. That LNG supply has largely been diverted from Asian markets because of the premium prices that the European market now offers, in contrast to the status quo. While the price cap that the commission is currently proposing may be symbolic, a more important question is whether such a cap is a good idea at all. If it dissuades suppliers from delivering gas to Europe when it is most needed, it could well exacerbate Europe’s energy crisis, and make the prospect of energy shortages this winter far more likely.