crude measures

The EU’s gas price cap treads a thin line between flexible and chaotic

The European Commission is due to propose a dynamic price cap this week
German chancellor Olaf Scholz (right) is one of the people European Commission president Ursula von der Leyen (left) must win over to implement a gap price cap.
German chancellor Olaf Scholz (right) is one of the people European Commission president Ursula von der Leyen (left) must win over to implement a gap price cap.
Photo: MANDEL NGAN/AFP (Getty Images)
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The EU is looking to counter gas price volatility, but has so far remained divided on how to do it. A new proposal from the 27-nation bloc’s executive arm, the European Commission, is due to be discussed this week.

The plan involves a temporary mechanism that would impose a dynamic price cap for transactions on the Dutch Title Transfer Facility (TTF), a virtual marketplace in the Netherlands used for trading. The TTF’s main index is the benchmark for all gas traded on the continent.

“This will help avoid extreme volatility and price hikes, as well as speculation which could lead to difficulties in the supply of natural gas to some member states,” the commission said in a draft document seen by Bloomberg News.

The EU member states still need to approve this “last resort” measure, and it would last for no longer than three months, according to Reuters. Around 15 countries seem to be on board with an Europe-wide limit on wholesale prices but some, like Germany, Austria, and Norway, worry that capping prices could hurt energy security as winter approaches.

Why does the EU need to control prices?

Before Russia invaded Ukraine on Feb. 24, Moscow used to contribute to 40% of the gas in EU. But since then, Russia’s tap has reduced to a trickle.

Many European buyers rejected the ruble-based payment system Putin put in place in April as a breach of contract. Over the next few months, Russia cut off the majority of gas supplies to the EU indefinitely, retaliating to sanctions against the Kremlin.

The share of gas from Moscow now hovers around 7%.

Moreover, OPEC seems to be in stride with Russia in its decision-making. It’s reducing output, which could send prices higher.

Charted: The Russia-Ukraine war’s impact on Europe’s gas

What else does the EU’s draft proposal suggest?

📝 Temporary intra-day price-spike caps on TTF. Last week, Italy, Poland, Greece, Belgium signed a document suggesting a central value should be set, with allowance for up to 5% of fluctuations and regular revision based on external parameters such as the price of crude oil and gas in North America and Asia.

🔖 The European Agency for Cooperation of Energy Regulators (ACER) coming up with a price benchmark for liquefied natural gas (LNG)

🤝 Joint purchases as a solidarity mechanism to avoid stark disparities while keeping gas demands from jumping up

Where else can the EU get energy from?

Implementing such a price cap is no easy feat. Arriving at a consensus is only the first problem. Establishing the appropriate caps and corridors without artificially suppressing prices or affecting demand and supply remain a challenge.

To avoid paying more money for less Russian gas, the EU has inked deals to get LNG or pipeline gas from the US 🇺🇸, Algeria 🇩🇿, Azerbaijan 🇦🇿, and others. Norway 🇳🇴 is already delivering more gas to the EU than Russia. It’s also trying to move towards LNG and interconnectors to reduce reliance on Russian oil.

In the long-term, renewable sources like hydrogen and biomethane are coming into focus. A month ago, the European Parliament approved the proposal to increase the target in the Renewable Energy Directive from 40% to 45% by 2030. The Commission earlier proposed reducing energy consumption in 2030 by 9% compared to 2020—now it’s pushing to up the target to 13%.

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