How can Europe contain gas prices?

BRUSSELS (Reuters) – Leaders of European Union countries will debate on Friday whether and how to cap gas prices, after member states increased pressure on Brussels to limit fuel costs.

European Commission President Ursula von der Leyen suggested gas price cap options to EU leaders on Wednesday, after France, Italy, Poland and 12 other countries urged Brussels to come up with a gas price cap. EU-wide gas prices as a way to contain inflation.

Other countries are opposed – including Germany, Europe’s biggest gas buyer, and the Netherlands – who say price caps could jeopardize energy security this winter.

The Commission also expressed doubts and, until Wednesday, had suggested the EU move forward with more limited versions of a price cap.

Here’s how Europe could cap the price of gas.

This is what the 15 EU countries urged the European Commission to offer in a letter, saying a price cap was “the only measure that will help each member state to ease inflationary pressure”. .

In a letter to EU leaders on Wednesday, European Commission President Ursula von der Leyen suggested they consider a temporary price cap, while the Commission works to launch an alternative benchmark price to the price of gas from the Dutch Title Transfer Facility (TTF).

“We should consider limiting prices against TTF in a way that continues to secure gas supplies to Europe and all member states,” its letter reads.

It did not specify whether such a cap would apply to all gas exchanges and import contracts that are indexed to the TTF price, or have a more limited scope.

The Commission was skeptical about a cap on wholesale gas prices for exchange transactions. In a paper analyzing various options last week, the EU executive said a wide cap could be complex to launch, pose energy security risks and disrupt fuel flows between EU countries.

Indeed, in the event of a supply shortage, price signals would no longer be able to generate flows to regions that urgently need gas, while a cap could also trigger supply interruptions of the share of foreign suppliers, according to the Commission document.

He suggested that such a cap could only work if a new entity was launched to allocate and ship scarce fuel supplies between states.

While a price cap would be a temporary solution, the Commission wants to introduce a more sustainable alternative reference price for gas in Europe.

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

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

Some industry sources have suggested that the industry should develop a new benchmark themselves. Its success would depend on its use by the gas industry.

Belgium, Greece, Italy and Poland presented their own proposal for a “dynamic price corridor” for gas on Thursday.

“The corridor would apply to all wholesale transactions, not limited to import from specific jurisdictions and not limited to specific use of natural gas,” the countries said in a document outlining the “corridor” – a range determined by and below the market price.

The document, seen by Reuters, suggested setting the corridor high enough to allow the gas market to function and flexible enough to ensure European countries could attract supply. If necessary, that could mean allowing gas transactions at above-corridor prices, he said.

The price of gas could fluctuate within the range of the corridor, in order to continue to provide price signals that steer supply to regions that need it, the document says, adding that it should also apply to contracts at term that are indexed to existing gas price benchmarks. .

CAPS ON THE PRICE OF GAS USED FOR ELECTRICITY

Von der Leyen said the EU should also consider an EU price cap specifically on gas used for power generation.

European electricity prices are set by the last plant needed to meet demand – usually a gas-fired plant. Falling gas-fired electricity costs could therefore lower the overall price of electricity – although governments would have to compensate gas-fired power plants for the difference between the capped price and the higher market price at which they buy fuel.

Spain and Portugal set up a program to do this in June – which helped reduce local electricity prices, but at the same time Spain’s gas consumption increased.

The Commission said any intervention to reduce gas prices must be combined with measures to avoid driving up gas demand when countries need to save scarce fuel.

The Commission suggested a Russian gas price cap in September, but scrapped the idea after resistance from central and eastern European countries feared Moscow would retaliate by cutting off the gas it still sends them.

Europe depended on Russia for around 40% of its gas before Moscow invaded Ukraine. This share fell to 9% as Russia cut off deliveries to Europe.

Given falling Russian volumes, some EU diplomats have said a price cap would do little to reduce European gas prices and would work more as a geopolitical move to cut Moscow’s revenue. .

The discussion of EU country leaders on Friday will give direction to Brussels on the type of measures they would support. Energy ministers from EU countries are meeting on October 11 and 12 to continue the debate on gas price caps.

The Commission, which writes EU policies, has said it is ready to propose additional measures to tackle the energy crisis. Once the Commission presents proposals, the 27 countries of the bloc will negotiate them and try to find a final agreement.

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

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