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10th Dec 2022

EU leaders discuss gas price cap — amid rationing fear

  • 'The deeper the public intervention on gas prices we envisage, the more demand reduction and supply solidarity we need,' EU Commission president Ursula von der Leyen told EU leaders ahead of a summit in Prague (Photo: EU2022_CZ)
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EU leaders will on Friday (7 October) discuss how to deal with gas prices to curb soaring energy bills, during their informal summit in Prague.

Following last week's discussions, the European Commission will present its roadmap to reduce gas prices to national capitals — in response to a call last month from 15 countries to limit the price of gas directly.

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The plan includes establishing a ceiling on the price of gas used to generate electricity in the EU market. But setting an EU-wide cap on gas prices has become a dividing issue since spring when the idea was first floated by Spain and Portugal.

Belgium, France, Poland, Portugal, Slovenia, Greece, Italy and Spain are among the supporters of a wholesale gas price cap, while Germany, Austria, the Netherlands, Hungary and Denmark have opposed the move so far.

"We have to understand we are not putting the security of supply into question… These prices are very high and are being paid by consumers who can't really afford it," said Estonian prime minister Kaja Kallas ahead of the meeting with her counterparts.

Greek prime minister Kyriakos Mitsotakis said on Wednesday talks in Prague will be focused on how to design a price cap for gas "that secures supply, keeps prices reasonable and maintains the internal market".

But some countries have already warned about the cost of inaction.

'Dynamic price corridor'?

Unless there is an intervention in the gas market, Europe may face "a massive deindustrialisation" and social unrest, Belgian prime minister Alexander De Croo told the Financial Times this week.

Poland, Italy, Belgium and Greece have put forward a proposal to establish a "dynamic price corridor" for gas.

"The corridor would apply to all wholesale transactions, not limited to import from specific jurisdictions and not limited to specific use of natural gas," said a document seen by EUobserver.

The corridor, which will set the price at a level high enough to allow the market to operate, aims to act "as a circuit breaker and disincentive to speculation," the group of countries said. But gas transactions at prices above the corridor would also be allowed.

Spanish and Portuguese experience

Energy experts have voiced concern over the impact of a price cap in the power sector — what Spain and Portugal implemented in mid-June.

The so-called Iberian exception has triggered an uptick in gas consumption in Spain and Portugal — prompting fears that the same effect could take place across Europe.

"A price cap on gas used in power generation will bring down the price of gas-fired electricity, and is therefore likely to lead to increased gas consumption," said Simon Dekeyrel, climate and energy policy analyst at the European Policy Centre.

Dekeyrel argues that this measure will exacerbate the scarcity in European gas markets, since demand could exceed the supplies available in the short term. "Whether this will lead to physical shortfalls, will then depend on how cold the winter gets."

Additionally, ensuring fair cross-border flows of subsidised electricity is also one of the main challenges that a price cap will entitle.

France, for example, has been importing subsidised electricity from Spain — benefiting from higher bilateral trade since mid-June.

Details on how the commission proposal would ensure a level playing field are still unclear.

Rationing?

In an analysis, Lion Hirth, a professor of energy policy at the Hertie School, also warned that a price cap could lead to a physical shortfall and prompt rationing of gas this winter.

But the EU executive believes that such a radical measure can still be avoided.

"Our demand reduction targets on gas and electricity are both intended to bring down demand to ensure that we do not need any rationing," said a commission spokesperson.

Nevertheless, the commission failed to clarify whether rationing plans are being considered at the EU or national level.

The EU executive warned EU countries that a gas price cap needs to go hand-in-hand with more energy savings.

"As the EU imports almost all the gas it consumes, the deeper the public intervention on gas prices we envisage, the more demand reduction and supply solidarity we need," commission president Ursula von der Leyen wrote on Wednesday to EU leaders ahead of a summit in Prague.

This will have to be translated into extra mandatory saving requirements beyond current voluntary targets, and binding agreements for gas supplies among EU member states, she said.

EU countries this summer agreed to voluntarily cut gas use by 15 percent, in the August 2022-March 2023 period, from the average from 2017-2021.

According to figures from Bruegel, EU gas demand has dropped by eight percent between January and September.

More time needed to agree possible EU gas price cap

EU leaders are expected to come back to the issue of gas price caps at their usual summit in Brussels on 20 and 21 October — when an agreement could be reached by the 27 heads of state and government.

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