Log in
Log in
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     
Sign up
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     
News
All NewsCompaniesIndexesCurrency / ForexCommoditiesCryptocurrenciesETFInterest RatesEconomyThemesSectors 

Explainer-How could Europe cap gas prices?

09/29/2022 | 12:59pm EST
Illustration shows natural gas pipeline and EU flag

BRUSSELS (Reuters) - The European Union is considering options to cap gas prices, as a growing number of countries pressure Brussels to put a lid on sky-high fuel costs.

France, Italy, Poland and 12 other countries wrote to the European Commission this week asking it to propose an EU-wide price cap on wholesale gas transactions to help rein in surging inflation.

Other countries are opposed - among them Germany, Europe's biggest gas buyer, and the Netherlands - and it is unclear whether there would be enough support among countries to approve any proposal.

The European Commission has also raised doubts, and suggested the EU instead move ahead with more limited versions of a price cap.

Here are the various ways Europe could cap the price of gas.

PRICE CAP ON ALL GAS

This is what the 15 EU countries called for the European Commission to urgently propose. "This price cap ... is the one measure that will help every member state to mitigate the inflationary pressure," they said.

The Commission is sceptical. In a paper analysing various options to tame gas prices on Wednesday, the EU executive said a broad cap on gas prices could be complex to launch and pose risks to energy security - arguments also made by wary countries like Germany.

The Commission said a wholesale price cap for exchange transactions - covering both liquefied natural gas and pipeline supplies - could disrupt flows of fuel between EU countries.

That is because in a supply shortage, price signals would no longer be able to drive flows to regions that urgently need gas. The Commission suggested such a cap could work only if a new entity was launched to allocate and ship scarce fuel supplies between states.

The EU would also need "significant financial resources" to ensure countries could still attract gas supplies from competitive global markets where other buyers may be willing to pay prices above the EU cap, the Commission said, adding that the move could risk "triggering supply disruptions" from foreign suppliers.

PRICE CAP ON RUSSIAN GAS

"I strongly believe we need a price cap on all Russian gas imports," EU energy commissioner Kadri Simson said on Thursday.

The Commission suggested a Russian gas price cap earlier this month, but shelved the idea after resistance from central and eastern European countries worried Moscow would retaliate by cutting off the remaining gas it still sends to them.

Europe relied on Russia for roughly 40% of its gas before Moscow invaded Ukraine. That share has dropped to 9% as Russia has since slashed supplies to Europe.

Given the low volumes Moscow now sends, some EU diplomats said a price cap would do little to reduce European gas prices, and would function as more of a geopolitical move to cut revenues to Moscow.

PRICE CAP ON GAS USED FOR ELECTRICITY

The Commission said it would also be ready to introduce an EU price cap specifically on gas used for power generation.

European electricity prices are set by the last power plant needed to meet demand - typically, a gas plant. Lowering the cost of gas-fuelled power could therefore bring down the overall power price - though governments would need to compensate gas plants for the gap between the capped price and the higher market price at which they buy fuel.

Spain and Portugal implemented a scheme to do this in June - which has helped pull down local power prices, but also coincided with an increase in Spain's gas use.

The Commission has said any interventions to lower gas prices must be coupled with measures to avoid an increase in gas demand, at a time when countries are scrambling to save scarce fuel.

NEW GAS PRICE BENCHMARK

The EU is also working on an alternative benchmark price for liquefied natural gas, which European countries are racing to buy from international markets to replace Russian gas.

Historically, the gas price at the Netherlands' Title Transfer Facility (TTF) hub has been used as a price benchmark for LNG deliveries into Europe.

But a major reduction of Russian gas supplies has made the TTF price extremely volatile, and more expensive than LNG prices in other regions.

Industry sources say the EU market needs to have a price that is reflective of the actual LNG supply and demand, although some suggested industry should develop a new benchmark on its own.

The success of the benchmark would depend on whether the industry starts using it.

"A new transactions-based LNG benchmark, based on objectively verifiable price assessments for cargo deliveries, would provide a valuable reference point for market participants to be used on a voluntary basis," the Commission said in its paper.

NEXT STEPS

EU countries' energy ministers will discuss possible gas price caps at a meeting on Friday. The Commission, which drafts EU policies, will then share details next month on the extra measures it is looking at to tackle the energy crunch.

Once the Commission puts forward proposals, the bloc's 27 countries will negotiate them and try to find a final deal. As well as price caps, Brussels is planning measures including emergency liquidity support for energy companies.

(Reporting by Kate Abnett in Brussels; Editing by John Chalmers and Matthew Lewis)

By Kate Abnett


ę Reuters 2022
Stocks mentioned in the article
ChangeLast1st jan.
S&P GSCI NATURAL GAS INDEX -6.78% 294.0819 Real-time Quote.80.64%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.61% 61.575 Delayed Quote.-19.90%
Latest news "Economy"
05:46pThe WSJ Dollar Index Falls 1.66% This Week to 97.28 -- Data Talk
DJ
05:46pEuro Gains 1.38% to $1.0543 -- Data Talk
DJ
05:46pSterling Gains 1.65% to $1.2294 -- Data Talk
DJ
05:45pUk and allies announce price cap of $60 on russian oil - hm trea…
RE
05:45pDollar Lost 3.51% to 134.31 Yen -- Data Talk
DJ
05:42pUtilities Down as Treasury Yields Rise -- Utilities Roundup
DJ
05:41pCommunications Services Tick Up as Netflix Adds to Gains -- Communications Services Roundup
DJ
05:36pU.S. Treasury says oil price cap 'institutionalizing' Russian crude discounts
RE
05:35pUkraine grain exports down 29.6% at 18.1 mln T so far in 2022/23
RE
05:34pTech Down on November Jobs Report -- Tech Roundup
DJ
Latest news "Economy"