EU races for deal on gas-price cap before worst of winter hits

Natural gas valves Source: iStock

European Union member states are making a desperate effort to agree on a plan to cap natural gas prices, a measure that has divided governments for months as the region grapples with an unprecedented energy crisis.

Energy ministers meeting in Brussels on Monday are discussing the latest draft compromise by the Czech government to lower the cap to €180 ($191) per megawatt-hour, according to two EU diplomats with knowledge of the matter. 

That compares with €188 floated on Saturday and €275 proposed by the European Commission last month. The market intervention measure would take effect from the beginning of February. 

A majority of member states wants to lower the cap from the commission’s proposal, which would have been toothless against some of the price levels reached last summer. The question now is how low. Germany, the region’s largest economy, has urged caution over too much market intervention.

Failure to strike a deal risks pushing the debate into next year, when winter is fully under way, so ministers are rushing to act now. Benchmark Dutch front-month gas futures are currently trading around €110 per megawatt-hour. However, a cold snap or any further disruption to supplies could cause another price spike.

Czech Industry Minister Jozef Sikela said he “strongly” believes a deal is possible after EU leaders last week threw their weight behind a quick agreement. The commission has said the cap should be a deterrent rather than a tool that should be actively used. It doesn’t aim to artificially set prices but to prevent extreme spikes.

The proposal to step into the market — demanded by a group of member states as far back as the spring — has caused deep rift among governments on how to contain the crisis triggered by a cut in gas shipments from Russia, formerly the bloc’s biggest supplier. In recent weeks, Germany led a push for a cautious approach due to fears it could endanger the security of supply, while Belgium, Greece, Italy and Poland demanded a more aggressive tool, with the price cap at €160. 

“Today we have to agree on a mechanism which will prevent the European households and businesses from high gas price spikes that we have seen during the last summer,” Sikela, who will chair the meeting because his country holds the EU rotating presidency, told reporters before the gathering. “We’re offering a solution that should satisfy both: those who call for the cap and those who fear it.”

At stake is the future of the bloc’s $17 trillion economy, where soaring energy prices have already fueled inflation and are threatening to push the region into recession. The crisis has stretched European governments’ budgets as they have racked up more than €700 billion in aid to companies and consumers, according to one estimate. But they continue to be under pressure from voters to do more to control soaring costs or risk a backlash.

“Nobody, including me, has anything against low prices,” German Economy Minister Robert Habeck told reporters, adding he hoped for a solution. “But we need to watch out that we don’t want the good and cause the bad.”

Compromise Sought

While the draft regulation on a price cap formally requires qualified majority support from member states, the Czech presidency has been trying to find a broader compromise. But Sikela didn’t rule out calling a vote on Monday if his endeavors to secure backing from all member states fail, a move that would effectively overcome German opposition.

A deal on the gas-price cap would also unlock a broader package of measures to rein in high energy costs that have sent businesses and consumers reeling. Gas and power prices soared to records earlier this year after Russia’s supply cuts in the fallout over the war in Ukraine. 

Under the latest Czech draft compromise, the so-called gas market correction mechanism would kick in when month-ahead contracts on the Dutch Title Transfer Facility exceed €180 per megawatt-hour for three working days. It would also require the gap with a pre-defined basket of liquefied natural gas prices to be greater than €35. Contracts above the cap won’t be allowed to be executed. 

In addition, the new draft enables the commission to cease its market intervention if it undermines the EU’s gas-demand reduction measures. The executive body would also immediately suspend the mechanism if it endangers the security of supply. Germany and some other countries have voiced fears that a price limit in Europe could make the region less attractive for sellers globally at a time when the bloc seeks alternatives to Russian shipments.

“Today is crunch time, so let’s make sure to get everyone on board to get a compromise that actually works,” said Miriam Dalli, Malta’s minister for environment, energy and enterprise. 

© 2022 Bloomberg L.P.

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