Caps and corridors: how can Europe contain gas prices?

Caps and corridors: how can Europe contain gas prices?

Updated: 1 month, 8 days, 12 hours, 3 minutes, 11 seconds ago

Ministers from European Union countries meet on Tuesday for yet another debate on whether and how to cap gas prices, as they look for ways to rein in fuel costs after weeks of talks.

EU country leaders last week asked their ministers and the European Commission to quickly decide on the price cap issue, with energy ministers expected to debate the pros and cons on Tuesday and possibly give the Commission the green light to make a firm proposal.

Still, opinions are split. France, Italy, Poland and 12 other countries last month asked Brussels to propose an EU-wide cap, after months of high gas prices driven by Russia cutting supply to Europe after it invaded Ukraine.

Others are opposed - among them Germany, Europe's biggest gas buyer, and the Netherlands - and say capping prices could cause demand for gas to rise or leave countries struggling to attract supply from global markets.

Here are ways Europe could cap the price of gas.

'DYNAMIC' CAP ON PRICE SPIKES

The Commission, which drafts EU laws, appears to be moving towards this option. Last week it asked for countries' approval to propose a "dynamic" price limit on trades at the Title Transfer Facility (TTF) Dutch gas hub, which serves as a benchmark price for European gas trading.

The temporary price limit on trades would kick in as a "last resort measure" if prices spike, the Commission said, adding it would need to meet conditions, including not causing Europe's gas demand to increase.

At a meeting last week, EU leaders supported exploring this idea.

But some EU diplomats said they still had questions about the proposal, including how it would affect the EU's ability to buy gas during a supply crunch if market prices rose above the capped price.

Once proposed, any cap would need approval from a reinforced majority of countries - possibly at an emergency meeting of energy ministers next month.

The idea echoes a scheme put forward earlier this month by Belgium, Greece, Italy and Poland for a "dynamic price corridor" - a price range with a central value below the market price - on trades in the wholesale gas market.

PRICE CAP ON GAS USED FOR ELECTRICITY

European Commission President Ursula von der Leyen last week said the EU should also look into a price cap specifically on gas used for power generation.

But in an analysis shared with EU countries on Monday, the Commission struck a more sceptical tone. The document, seen by Reuters, warned the scheme could increase Europe's gas use and exports of EU-subsidised electricity.

European electricity prices are set by the last power plant needed to meet demand - typically, a gas plant. By capping the cost of gas used to generate power, and compensating gas-fuelled power plants for the difference between the capped price and the market price for gas, the scheme could bring down the overall power price.

Spain and Portugal implemented a scheme to do this in June - which has helped to reduce local power prices, but also Spain's gas use increased.

The Commission warned rolling out the scheme EU-wide - an idea France has championed - could see EU gas demand rise by up to 9 billion cubic metres, and would require measures to prevent the resulting cheaper electricity from flowing to non-EU countries like Britain.

NEW GAS PRICE BENCHMARK

While a price cap would be a temporary fix, the Commission wants a more lasting alternative price benchmark for gas in Europe, and has asked EU energy regulators to launch one by March 31, 2023.

Historically, the gas price at the TTF hub has been used as a benchmark for liquefied natural gas (LNG) deliveries into Europe. But the major reduction of Russian gas supplies this year has made the TTF price extremely volatile, and more expensive than LNG prices in other regions.

Brussels says a new index is needed since the TTF is guided by pipeline supply and no longer represents a market that includes more LNG.

Some industry sources have suggested industry should develop a new benchmark on its own. Its success would depend on whether the gas industry uses it.

PRICE CAP ON ALL GAS

Fifteen EU countries last month asked the Commission to propose a broad price cap on all wholesale gas trades, saying it would help contain surging inflation.

The Commission has been sceptical about a broad cap. A paper analysing various options last month said such a cap could be complex to launch, pose risks to energy security and disrupt fuel flows between EU countries.

That is because, in a supply shortage, regions that urgently need gas may no longer be able to outbid other countries to ensure they secure enough. A cap also risks triggering supply disruptions if foreign suppliers send gas to buyers outside Europe where prices are higher, the Commission paper said.

PRICE CAP ON RUSSIAN GAS

The Commission suggested a Russian gas price cap in September but dropped the idea after resistance from central and eastern European countries worried Moscow would retaliate by cutting off the 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 8% as Russia has cut European supplies.

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

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