Ursula von der Leyen has opened the door to a targeted, temporary EU-wide cap to curb soaring gas prices and curb market speculation.
But his message comes with warnings about the potential risks the cap entails.
“While gas prices have fallen in recent weeks, they remain very high and weigh heavily on citizens and our economy,” the European Commission President wrote in a letter to European leaders on the eve of a meeting. high level in Prague.
“We need to protect our single market, which has repeatedly provided resilience in the face of crisis.”
Von der Leyen envisions two different shapes of gas caps that would work in parallel.
The first should apply to Ease of title transfer (TTF), the first European reference. The virtual hub brings together suppliers and customers, who sign agreements for immediate and future gas deliveries.
TTF prices, set in euros per megawatt-hour and changing daily, are the main point of reference for the entire European energy sector.
The Commission believes that the TTF is too influenced by the pipeline due to the EU’s long-standing reliance on Russian imports. Countries have changed dramatically this year to liquefied natural gas (LNG)a flexible alternative that is shipped worldwide on tankers.
With TTF still the primary hub, the two sources are traded together, exposing LNG to market speculation fueled by Russia’s manipulation of the pipeline. This situation, according to the Commission, forces the EU to pay higher LNG prices than its competitors in Asia and America.
“The title transfer facility is no longer representative of imported gas,” von der Leyen wrote.
As the Commission pushes to create a ‘complementary’ benchmark for LNG, the bloc is expected to impose a ‘price cap’ on transactions taking place in the TTF to avoid excessive fees for companies buying gas – costs which are then passed on to consumers.
But that market capitalization, the president said, should be accompanied by more stringent gas reduction plans – beyond the 15% target agreed in July – as well as legally binding solidarity agreements so that Member States can help each other in the event of supply shortages.
“We need to recognize the risks that a gas price cap entails and put in place the necessary safeguards,” von der Leyen warned.
Gas cap but only on electricity
A second price cap would apply to gas used for electricity generation.
In the liberalized EU market, the price of electricity is set by the most expensive fuel needed to meet all electricity demands. In this case, this fuel is gas. As gas prices rise, so do electricity bills.
“We should limit this inflationary impact of gas on electricity, everywhere in Europe,” says von der Leyen.
To this end, the Commission is prepared to discuss a cap on the price that gas-fired power plants have to pay for gas supply. In principle, this would exclude gas used for other purposes, such as industrial production and household heating.
The cap resembles the objectives of the Iberian model adopted by Spain and Portugal: a massive program of state aid that partly compensates for the high costs incurred by gas-fired power plants.
However, it is still unclear whether the measure proposed by von der Leyen would amount to state aid or be maintained by other means.
Bruegel, a Brussels-based economic think tank, has warned against this targeted cap, arguing that it would lead to higher gas consumption and a spillover of subsidized electricity beyond EU borders.
In his letter, von der Leyen expressed similar concerns and called for more mandatory energy savings.
The two gas caps would be time-limited, she said.
Experts said that any kind of gas cap would put an end to the forces of the free market and compel governments to negotiate the distribution of gas flows and coordinate rationing plans.
Joint purchases and green investments
Beyond market intervention, von der Leyen suggested that the EU should intensify bilateral discussions with “reliable suppliers”, such as Norway and the United States, in order to negotiate lower prices for the block.
The Commission chief also wants to set up a joint procurement system that would allow the EU to act as a single buyer, as was the case for COVID-19 vaccines.
“We need to avoid a scenario where member states outbid each other and drive up prices,” von der Leyen said. “Group purchasing will strengthen our hand in reducing high supplier rents.”
This idea has been touted since the beginning of the crisis but has not yet materialized. An EU energy platform created in April has not been given the necessary mandate to make purchases on behalf of the entire bloc.
The joint supply should be operational before 2023-2024, von der Leyen said, when filling gas storages would become difficult in the absence of Russian gas.
Finally, von der Leyen called for greater investment in green technologies and energy efficiency to reduce reliance on imported fossil fuels.
The Commission will endeavor to increase the public funds allocated to the REPower EU program, which aims to raise up to 300 billion euros by the end of the decade. Of these, 225 billion euros will come from unused loans taken out from the coronavirus recovery fund.
Von der Leyen’s letter is not a formal proposal and aims to start a debate ahead of an informal meeting of EU leaders on Friday.
While a growing number of Member States are actively pushing for gas price caps, others, such as Germany and the Netherlands, stay opposed and prefer to bet on group purchases instead.