Prices on the energy market are as low as they haven’t been in months. European politicians might see this as a result of last week’s EU summit. “The decisions taken last night led to a drop in the price of gas,” former Italian Prime Minister Mario Draghi said on October 21. “After the agreement, the price dropped by 10%, showing that speculation is a significant factor,” Draghi added. EU Council President Charles Michel also stated that the summit deal had already led to prices falling. In any case, the EU leaders’ lengthy negotiations led to results on how to tackle the energy crisis. Among the proposals were a price cap, joint gas purchases and a new price index for liquefied gas. What does this mean?
Price cap light
For months, negotiations between the member states about how such a price cap could look have been going on. Several countries, including Italy, Belgium, Greece and Poland, have been pushing for a price cap “to all wholesale natural gas transactions.” Germany and the Netherlands have been arguing that such a price cap could jeopardize the security of supply or lead to increased gas consumption. The EU leaders’ result is to work on a gas price cap to limit extreme price peaks. Their joint declaration said a “temporary dynamic price corridor on natural gas transactions” should not jeopardize the security of supply. This is regarded as the lowest common denominator all countries could agree to. A number of heads of state and government claimed the results of the summit were a success.
The proposed mechanism is not intended to depress the current price level, but is only intended to be used when manipulations such as the Russian delivery freeze via Nord Stream 1, for example, drive up prices. In fact, the summit compromise remained vague. A “roadmap” for the coming weeks and months was agreed upon.
Joint gas purchases
The EU member states also agreed to buy gas together. A new EU platform for joint gas purchases will coordinate the filling of reservoirs. The joint purchase is made on a voluntary basis, except for a mandatory participation of the member countries over at least 15 percent of the gas storage capacity. After the debate, Dutch Prime Minister Mark Rutte said that some measures, like buying gas together, were easier to implement than others – such as preventing gas price peaks.
Development of a new price index
The member states also agreed to move forward with creating a new gas-price index by early 2023, which is not so easily subject to speculative fluctuations as the current one. Therefore, EU leaders tasked the Commission with developing a complementary price index for liquefied natural gas (LNG) as an alternative to the Dutch Transfer Title Facility (TTF) gas price index, which has been mainly used for pipeline gas in the past. The gas price index serves as a reference price for many natural gas transactions across the bloc.
Energy ministers’ meeting
The energy ministers already met on Tuesday to discuss the proposals on the table.
Agreement on joint purchases
Croatian Minister for Economy and Sustainable Development Davor Filipović said a majority of the member states supported joint gas procurement and creating a new exchange index which should stabilize and limit wholesale gas prices. They were also in favor of establishing a price corridor, which would envisage the lowest and highest gas price. Furthermore, EU Energy Commissioner Kadri Simson said after the meeting on Tuesday that the EU’s energy ministers supported the proposal by the Commission to make joint purchases of gas operational as of next year. Joint purchases would be the “most efficient way” to lower the price of gas in the EU, German Minister for Economic Affairs Robert Habeck said on his arrival to the talks. “Europe has great market power. If the big players are allowed to collaborate, to form purchasing pools, then Europe’s market power will have an impact,” he stated.
Opinions on price cap still differ
There was wide support for the “introduction of dynamic price cap on electricity and gas, which would limit the excessive price spikes in case of a market panic,” said Czech Industry Minister Jozef Sikela at the press conference after the meeting.
However, the ministers “have rather different views” on a mechanism to limit the price of gas traded at the TTF, as previously proposed by the Commission, said Sikela, who chaired the meeting. Bulgaria, for instance, said at the meeting it is in favor of a gas price cap, if the cap covers all imported quantities. “The main question is how to make sure that capping will still allow us to buy the gas we need on the market,” Sikela said.
Another idea, that of capping the price of gas used by electricity power plants, – a solution vigorously advocated by France, but rejected by Germany – was discussed after the dissemination of a Commission document listing the undesirable effects in the event that this device, currently applied only in Spain and Portugal, became more widespread in the EU.
In particular, Brussels points to the risk of inflating European gas consumption, the variable financial cost of the individual states and the danger of subsidizing electricity exported to third countries.
“Now, it us up to member states if they will find a solution especially how to well address the flows to third countries and how to agree on the cost-sharing principles,” stated Commissioner for Energy Kadri Simson at the press conference. “This analysis is necessary before we [the EU Commission] will make a legislative proposal” on this mechanism, but “another necessary precondition … is broad enough support among member states to take this proposal forward,” she added.
Results in November?
For the French Minister of Energy Transition, Agnès Pannier-Runacher, “the ball is in the Commission’s court”: the 27 member states “have given a consensual and unanimous mandate” to the European executive to “develop a proposal on this subject very quickly,” she insisted.
Within the Belgian government, which had been pushing for a more ambitious price cap, frustration grows that after months of discussion, the Council is still not able to take concrete decisions, because the Commission still has not put detailed, technical proposals on the table. Belgian Energy Minister Tinne Van der Straeten now expects the Commission to come forward with proposals concerning a temporary mechanism to limit episodes of excessive gas prices.
Croatian Minister for the Economy Filipović expects an agreement to be reached at the next meeting of energy ministers on November 24. According to Slovenian Infrastructure Minister Borjan Kumer, this will be the last possible day to agree on the measures. “I would not want to sacrifice quality in order to reach an agreement a week earlier,” concluded Kumer.
After the EU summit, EU Commission President Ursula von der Leyen was certain that a “dynamic price corridor” would be introduced. German Chancellor Olaf Scholz pointed out that “a lot of technical work still needs to be done.” According to him, the ministers must take a possible decision on the issue unanimously, otherwise an EU summit will have to deal with it again.
This article is published Fridays. The content is based on news by agencies participating in the enr.