Energy crisis: Ursula von der Leyen opens the door for an EU cap on gas prices but with caveats

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By Jorge Liboreiro
Ursula von der Leyen said any kind of price cap on gas would have to come with new mandatory savings and binding solidarity agreements.
Ursula von der Leyen said any kind of price cap on gas would have to come with new mandatory savings and binding solidarity agreements.   -   Copyright  European Union, 2022.

Ursula von der Leyen has opened the door for a targeted and temporary EU-wide cap to rein in soaring gas prices and curb market speculation.

But her message comes with caveats about the potentials risks the cap entails.

"While gas prices have come down in the past weeks, they remain very high and are putting a heavy burden on people and our economy," the European Commission president wrote in a letter to EU leaders on the eve of a high-level meeting in Prague.

"We need to protect our single market, which has time and again provided resilience in the face of crisis."

Von der Leyen envisions two different forms of gas caps that would work in parallel.

The first one should apply to the Title Transfer Facility (TTF), Europe's leading benchmark. The virtual hub brings together suppliers and clients, who sign deals for immediate and future deliveries of gas.

Prices at the TTF, which are set in euros per megawatt-hour and change on a daily basis, serve as the main reference point for Europe's entire energy sector.

The Commission believes the TTF is overly influenced by pipeline gas due to the EU's long-standing dependence on Russian imports. The countries have this year drastically shifted to liquefied natural gas (LNG), a flexible alternative that is shipped around the world on tankers. 

Since the TTF is still the leading hub, both sources are traded together, exposing LNG to the market speculation fuelled by Russia's manipulation of pipeline gas. This situation, the Commission argues, makes the EU pay higher LNG prices than its competitors in Asia and America.

"The Title Transfer Facility is no longer representative of the imported gas," von der Leyen wrote.

While the Commission works to create a "complementary" benchmark for LNG, the bloc should impose a "price limitation" on the transactions taking place across the TTF in order to prevent excessively high fees for companies that buy gas – costs that are then passed onto consumers.

But this market cap, the president said, should be accompanied by more stringent gas reduction plans – beyond the 15% target agreed in July – as well as legally-binding solidarity agreements so that member states can help each other out in the event of scarcity of supplies.

"We need to acknowledge the risks that a cap on gas prices entails and put in place the necessary safeguards," von der Leyen warned.

Gas cap but only on electricity

A second price cap would apply to the gas used for electricity generation.

In the EU's liberalised market, the price of electricity is set by the most expensive fuel needed to meet all power demands. In this case, this fuel is gas. As gas prices surge, so do electricity bills.

"We should limit this inflationary impact of gas on electricity, everywhere in Europe," von der Leyen says.

To that end, the Commission is willing to discuss a cap on the price that gas-fired power plants have to pay for gas supplies. In principle, this would exclude gas that is used for other purposes, like industrial production and heating households.

The cap resembles the goals of the Iberian model adopted by Spain and Portugal: a massive state aid programme that partially compensates the high costs bore by gas-fired plants.

However, it's still unclear if the measure proposed by von der Leyen would amount to state aid or be sustained through other means.

Bruegel, a Brussels-based economics think tank, has warned against this targeted cap, arguing it would lead to a higher consumption of gas and a spill-over of subsidised electricity beyond the EU borders.

In her letter, von der Leyen voiced similar concerns and asked for more mandatory energy savings.

Both gas caps would be time-limited, she said.

Experts have said any sort of gas cap would put an end to free market forces and compel governments to negotiate over the allocation of gas flows and coordinate rationing plans.

Joint procurement and green investment

Beyond the market intervention, von der Leyen suggested the EU should step up bilateral discussions with "reliable suppliers," like Norway and the United States, in order to negotiate lower prices for the bloc.

The Commission chief also wants to set up a joint procurement scheme that would allow the EU to act as a single buyer, as it was the case for the COVID-19 vaccines.

"We have to avoid a scenario in which member states are outbidding each other and driving prices up," von der Leyen said. "Joint purchasing will strengthen our hand to reduce suppliers' high rents."

This idea has been touted since the beginning of the crisis but has not yet materialised. An EU energy platform established in April has not received the necessary mandate to conduct purchases on behalf of the entire bloc.

Joint procurement should be up and running before 2023-2024, von der Leyen said, when refilling gas storages would become challenging in the absence of Russian gas.

Finally, von der Leyen called for stronger investments in green technology and energy efficiency to slash dependency on imported fossil fuels.

The Commission will try to expand the public funds allocated to the REPower EU programme, which aims to raise up to €300 billion by the end of the decade. Of these, €225 billion will come from unused loans taken out from the coronavirus recovery fund.

Von der Leyen's letter is not a formal proposal and is meant to start a debate ahead of an informal meeting of EU leaders on Friday.

While a growing number of member states are actively calling for a price cap on gas, others, like Germany and the Netherlands, remain opposed and prefer instead to bet on joint procurement.