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Keeping the gas flowing and the prices low: can a price cap on gas be achieved?

Yesterday the European Council adopted the eighth package of sanctions against Russia, following what were defined as illegal “referenda”, the mobilisation of further troops and, once again, the threat to use weapons of mass destruction.

Concerning trade, the EU extended the import ban to new products that altogether generate significant revenues for Russia. However, one of the main aspects of the meeting was the agreement reached on a price cap related to the maritime transport of Russian oil for third countries and further restrictions on the maritime transport of crude oil and petroleum products to third countries.

What is a price cap and what is it needed for?

A price cap is a regulatory tool that puts a maximum price on certain raw materials. As the President of the European Commission, Ursula von der Leyen said, it is a tool that will help cut revenues to Russia while “reducing the electricity prices ahead of a structural reform of the electric market.”

And while we wait for such a reform (on one hand, really timing, as the current market was built in an era that doesn’t resemble anymore the one we live in, due to the high penetration of renewables; but, on the other hand, very difficult to achieve amidst the current energy crisis), EU Ministers cannot agree on a price cap on gas that is used to produce electricity. The idea originated in Belgium and was supported by several EU Member States, including some from the CEE region, like Greece, Poland, Romania, Croatia, Lithuania, Slovenia, Slovakia and Latvia.

“Now it is time to discuss how to limit the peaks of energy prices,” said Ms von der Leyen,ahead of the informal meeting of the European Council in Prague. “It is a discussion about price caps and the question of where to put them and how to put them.”

But one country, the one that so far made the strongest efforts to keep Europe unified, has decided to take the situation into its own hands: Germany.

Germany’s decisions could destroy the European single market

Berlin has announced a 200 billion euros aid scheme to help consumers and businesses cope with rising energy prices. To help its case, German chancellor Olaf Scholz said to be worried that a price cap on gas will not guarantee the supply for the winter season and that the risk that suppliers will sell outside of Europe is too high.

Immediately, this solution raised concerns even from CEE Member States, worried that the solidarity principle has been thrown out away.

The Latvian prime minister Krisjanis Karins defined Berlin’s decision as “distorting” while the Polish premier Mateusz Morawiecki was even harder saying that the German plan “risks to destroy the whole European single market.”

“There are a number of measures we can take to bring the gas prices down,” said Mr Karins, before the start of Prague’s meeting. “But we can only do it at the European level, not by individual States. If we can get the prices of gas down, we can help our economy and our citizens and at the same time maintain the support amongst them for the war efforts against Russia.”

According to him, we need better coordination of the type of aid we provide our citizens and companies to keep the level playing field so that no business is more competitive than the other.

Other approaches

In Mr Scholz’s point of view, Germany is only taking care of its own citizens until the energy prices will go down. And of the same opinion is the Netherlands which mobilised funds for its citizens in the amount of 23.5 billion euros.

Different, and unique, is the position of Hungary’s prime minister Viktor Orbán that allowed the State-owned energy group MVM to agree with Gazprom for deferring its payments for gas purchases if prices exceed a certain threshold value. Indeed, Hungary has been against sanctions since the beginning, considering them as the wrong tool to address the war and the cause of the current energy crisis and the record-high prices. That’s why, for example, the country voted against imposing sanctions on nuclear energy and the Atomic Energy Authority issued the licence for the construction of two power units at the Paks II nuclear power plant site. 

A new proposal on the table

Thus, so far, the only thing all EU States agree on is to find a new virtual trading point, different from the TTF currently used.

A proposal that just arrived on the table aims at finding a middle ground and it is signed by Poland, Greece and Italy. The non-paper is proposing a dynamic EU price cap on gas in a scenario in which there is gas on the market. The idea is to have the possibility to set a central value that would be regularly revised on the basis of external parameters (such as the price of crude oil) and would allow fluctuations (of up to 5 per cent, for example).

If it works, consumers and households will see a slowdown in the price spike. However, it will work only if there is gas on the market. After the Nord Stream I pipeline has been indefinitely closed, experts fear that the reaction from Russia will be to sell gas somewhere else at a better price.

“If a price cap on gas could be achieved, it would be grand,” pointed out Krisjanis Karins. “We cannot endanger the security of supply so we cannot set the price in a way that no one would sell gas into Europe. The goal is to be able to keep the gas flowing and lower the prices.”

“Energy prices are skyrocketing but if you look at the last seven months you can see that Russia has deliberately and systematically cut the gas supply to the EU but we were able to compensate,” said Ms von der Leyen. “First, by filling our storage by 90 per cent and it is very good, then we have been able to attract LNG and pipeline gas from reliable suppliers like Norway and the US.”

“A second point important is the single market and the level playing field so that all businesses have the same opportunity to participate in the single market, competing through quality and not through subsidies,” she continued.

However, there are still a couple of weeks before any formal decision can be made. As President von der Leyen underlined before the start of the informal meeting, it is only an informal council so no conclusion will be taken, only recommendations in preparation for the formal Council that will take place at the end of October.

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