Prime ministers and presidents from the EU’s 27 countries are gathered in Brussels today for a summit that will focus on the continued energy challenges stemming from the Ukraine war, and fears for the coming winter. They are expected to give their nod to a package of proposals for unprecedented interventions in the energy market unveiled by the European Commission on 18 October, but they will spend most of their time on what is missing from this package: a cap on the wholesale price EU countries pay for gas imports.
A total of 15 EU countries – including Belgium, France, Greece, Italy, Portugal, Romania, Slovenia and Spain – have called for this cap, while 11 countries – including Germany, Sweden, Austria, Denmark and the Netherlands – oppose it. The opponents say it would backfire on the EU because the liquefied natural gas (LNG) Europe so desperately needs would go to global competitors willing to pay more.
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“What will we do if LNG tankers are redirected to Asia?” asked Luxembourg’s Energy Minister Claude Turmes on Tuesday. “A cheaper and safer alternative is to reduce consumption first, and cap only gas used in electricity production.” The other problem with capping the price of imports is this could require the creation of a new EU coordination agency that would need to manually allocate gas supplies if energy demand in several countries spiked at the same time – and the price cap restricted supplies to meet that demand.
Between them, the 15 countries in favour would appear to have a qualified majority of votes in the EU Council to pass the cap, but they cannot do so without a proposal from the Commission, the only EU institution that can initiate legislation.
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The Commission says the 15 countries don’t seem to have the same idea of what a gas price cap is, and wants a clear mandate before it puts forward a proposal. Failing to get that at other summits over the past two weeks, the Commission has for now put forward a menu of possible capping mechanisms in what President Ursula von der Leyen called a “two-step process”. Leaders should discuss those today; energy ministers should choose one option at a meeting next Tuesday; and only then will the Commission come out with a proposal.
“In March already we were proposing such a capping mechanism, but at that time the proposal was not mature, we couldn’t find majorities,” the president told a press conference on 18 October. “But… there is an increased understanding now among member states, and our approach is now more widely shared.”
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By GlobalDataHer comments raised eyebrows because the Commission’s original proposal – which it is still pushing – wanted to cap only Russian gas imports, something since deemed unfeasible by national governments because it would be subject to legal challenges and could be considered a sanction, which would mean it could vetoed; for example, by Hungary. In contrast, a cap on all gas imports would only need majority approval.
North-south animosity in Europe
The dispute over the EU gas price cap is just one of several energy disputes that have revived divisions reminiscent of the European debt crisis a decade ago. Berlin is angry with Paris for blocking construction of the MidCat pipeline that would bring LNG from ports in Iberia to Germany. Everyone is angry with Berlin over its unilateral adoption of a €200bn energy self-bailout that could destabilise the EU single market.
“In early summer Germany called for solidarity, only by late summer to announce a €200bn national energy emergency plan that caused consternation in member state capitals throughout the bloc,” says Pawel Zerka, a policy fellow at the European Council on Foreign Relations, a think tank. “Berlin now bears a particular responsibility for rebuilding trust among the EU 27, not least because of its earlier cosy energy relationship with Russia.
“As things stand, the European Union may be heading for a situation in which some wealthier member states opt for a go-it-alone approach,” he added. “This would be a disastrous mix not just for Europe’s capacity to face the energy crisis but also for mutual trust across the continent.”
There is also frustration that the proposals now being adopted have been called for by Spain and Portugal for a year. However, Spanish Prime Minister Pedro Sanchez was repeatedly rebuffed, sometimes arrogantly, by northern European leaders. Madrid can now say 'I told you so' – but at what cost?
The leaders are now considering adopting the so-called "Iberian model' EU-wide. Back in March, Spain and Portugal obtained permission from the other EU countries to deviate from normal single market rules and be allowed to cap the price of gas used to generate electricity. That seems to have had the effect of lowering energy prices in Iberia over the past months, although it also may have had the knock-on effect of causing electricity use to shoot up higher compared with the rest of the EU. There is also concern that some of that electricity subsidised by Spanish taxpayers has flowed over to France, benefitting French households that aren't paying for the subsidy. If the model is adopted at EU level this would end the French freeloading, but in turn the pattern would be repeated with third countries not in the EU, notably the UK, Switzerland, Norway and the western Balkans. Border countries with a lot of electricity interconnections, such as Belgium, are worried that their taxpayers will be subsidising British electricity use. Although President von der Leyen seemed to be talking about an EU-level Iberian model being on the way at her press conference on Tuesday, there is no actual legislative proposal for such an electricity generation price cap in this package.
Unprecedented measures
The measures proposed by the Commission on 18 October are expected to get big-picture approval by national leaders this week, with the details being ironed out at the meeting of EU energy ministers next week. It may be a rocky ride, however. Countries angry about Germany’s self-bailout expect Berlin to compensate by giving in either on the gas price cap or the issuance of new joint EU debt to fund an EU-wide energy recovery fund. The latter was proposed by heavyweight commissioners Thierry Breton (from France) and Paolo Gentiloni (from Italy) in an op-ed earlier this month, which also berated Germany. It is believed they went over the head of President von der Leyen (from Germany) to get it published. Von der Leyen and the 26 other EU commissioners are supposed to be neutral and leave their nationality at the door.
The 18 October package includes a proposal for joint EU gas purchasing, mostly voluntary but required for the last 15% of gas storage-filling, a difficult part of the process where EU countries often outbid each other and drive up the price. This has already been unofficially agreed by national governments, which are now expected to give their backing to this legislative proposal.
There is also a proposal to create a new benchmark for LNG that would differentiate it from the Dutch TTF benchmark currently used to set prices for all gas but dominated by pipeline gas. That will be operational by March 2023, and in the meantime a bridging mechanism will seek to lower LNG prices that are too reflective of pipeline prices and contain price spikes of energy derivatives.
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“After focusing on electricity market interventions in September, the European Commission has now turned to measures to tame gas prices,” says Elisabetta Cornago, a researcher at the Centre for European Reform, a think tank. “Price limits for gas transactions on the TTF exchange may be difficult to implement and might risk muddling incentives to save energy. Joint procurement of gas instead is a smart approach to negotiate more convenient gas prices, which should ultimately benefit consumers.”
Another measure is an emergency brake on gas prices that would be triggered when these pass a yet-to-be determined threshold across Europe’s trading hubs. Separately, market rules will be changed to allow governments to inject cash into energy businesses facing bankruptcy, with the threshold raised from €3bn to €4bn and the eligible list of assets expanded to include non-cash collateral to make sure companies can afford now-more-expensive supplies.
Finally, another proposal calls for default solidarity deals that will automatically apply between countries in event of an emergency. The Commission has been calling for such deals, but so far only six out of 40 possible bilateral deals have been arranged, von der Leyen said. The rule would require neighbouring countries to respond to a request for energy help within 12 hours and deliver the requested supplies within three days. In this provision some see a future lifeline for Germany, at the expense of its neighbours, and after a selfish self-bailout.
These latest measures come on top of the unprecedented measures already adopted over the past months that have succeeded in getting the EU’s energy storage up to 92% full and reducing reliance on Russian gas from 40% before the war to 10% today.
