Brussels Pushes Gas Price Ceiling Citing EU Displeasure

The European Commission has failed to submit the legislative proposal required for the development of a prospective EU-wide gas price ceiling, and countries continue to disagree on the matter ahead of a meeting coming up where ministers were supposed to endorse it. The European Commission proposed a dynamic pricing ceiling for gas imported into the EU in October but left the specifics up in the air since it said it wanted feedback from EU member states first.

With seven days until a meeting of EU energy ministers on November 24, Brussels has yet to submit formal legislation on the subject. Instead, the EU executive distributed another non-paper to EU capitals outlining the potential structure of a gas price correction mechanism as well as the benefits and dangers of doing so.

With a view to submitting a formal proposal to an EU minister at a later time, the paper outlines the key components of the Commission’s impending legislative text. The report states that this sketch aims to serve as a framework for further debate of the mechanism in question, although it is unclear when the conversation will come to a close.

After a meeting of EU energy ministers on November 24, where they are anticipated to direct the bloc’s executive to press on with the idea, the Commission, which creates EU policy, will propose a cap, according to EU energy commissioner Kadri Simson.

Simson told Reuters in an interview on the margins of the COP27 climate summit in Egypt that they will move quickly and will present a formal proposal promptly after ministers authorise them to do so.

Describing A Possible Price Cap

Despite not being a formal legislative proposal, the Commission’s non-paper offers more information on the potential design of the mechanism. It would take the form of a “static ceiling” on Dutch TTF month-ahead products, which serve as Europe’s primary standard for wholesale gas prices.

According to the document, this ceiling would be fixed but with dynamic features. If the monthly price basis reaches a particular level and the increase is unconnected to prices on the global market, it would be enacted immediately. Although the cap price has not been specified, the study suggests that the price rise in August 2022, when the price of a megawatt hour reached €350, may serve as a guide.

Additionally, the measure has safety nets, such as a monthly review that could disable it if no longer necessary and a suspension mechanism in the event of unplanned market disruptions that affect intra-EU gas flows or supply security. Moreover, because spot and day-ahead products would imply greater risk for the volatility of short-term marketplaces and the security of supply, the provision is limited in scope and only covers month-ahead products.

The article contends that by excluding over-the-counter trading, which cannot be adequately regulated and serves as a safety valve to guarantee supply security, over-the-counter commerce would also be eliminated. According to a senior advisor at the Regulatory Assistance Project, Bram Claeys, relying on over-the-counter trade has major drawbacks because it is opaque and only allows small participants a limited amount of access.

The mechanism could lead to a shift toward over-the-counter trading, which the Commission itself cautions against because it is less open, entails higher default risks, and might only be available to big, better-financed firms.

Cons And Benefits

The non-paper claims that the proposed approach has certain benefits, such as reducing speculation about the future. If it is transparent and well-designed, it should also have a minimal effect on the market.

The Commission does, however, clearly highlight the measure’s drawbacks. While it may be able to temporarily reduce excessive prices, it is not a mechanism to fundamentally lower the price levels, which can only be accomplished by extra supply and demand reduction initiatives, according to one study.

The report also reiterates the general concerns of the European Commission on price ceilings, warning that if the ceiling is set high than the global pricing, it may undermine the EU’s capacity to attract desperately needed LNG supplies. The non-paper, according to Claeys, explains a method that could technically operate.

He did, however, stress that this is a last-ditch strategy and that demand reduction and efficiency auctions are much better alternatives. If something needs every safety precaution listed, it usually isn’t the best idea. The sole defence offered by him seems to be that it would give some peace of mind by preventing really significant price surges.

Increasing Discontent In EU Capitals

The non-paper from the Commission comes amid mounting resentment from EU member states that support gas price caps. A gas price restriction has been requested by 15 EU nations for some time, including Bulgaria, Belgium, France, Lithuania, Greece, Croatia, Latvia, Malta, Poland, Italy, Romania, Portugal, Slovakia, Slovenia, as well as Spain, but the EU executive has seriously delayed it, as per a diplomat. The price cap is still under pressure, especially from Belgium, Greece, Italy, and Poland. The fanatic four, as they are known, are said to be considering opposing other provisions of the deal if a price cap offer is not made.

Other price cap-supporting nations take a softer line but nonetheless voice their dissatisfaction with the lack of advancement. Another diplomat said that the majority of the package only had a few minor flaws that needed additional correction.

They continued, saying this should be high enough to allow the market to function, but they still view the formation of a pricing corridor for gas as a vital policy with the possibility of contributing to the lowering of gas prices for consumers in the EU. The Netherlands, Austria, and Germany are among the countries that are still hesitant about a price ceiling. Others, though, are more in favour of the EU executive. According to another diplomat, the European Commission is actively working.

The Commission’s efforts are acknowledged by the Council. The Council is engaging on its recommendations and is prepared to work on additional recommendations as part of the European Council’s mission, they continued. Aside from the price ceiling, the wider package of EU measures to control gas prices has received strong approval. These measures include mandatory joint purchases and a rescue agreement that would assure collaboration between EU nations in the event of an emergency.