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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Disagreement Over Gas Price Cap Jeopardizes EU Energy Crisis Plan

  • EU members are struggling to find common ground over a proposed cap on Russian natural gas prices.
  • The disagreement over the price cap could jeopardize the bloc’s energy crisis response plan. 
  • “The discussion is extremely complicated because there are simply different views . . . [but] we want to work hard in the remaining days to reach an agreement,” said Jozef Sikela, Czechia’s energy minister.

The European Union’s energy crisis response plan is being challenged by the bloc’s members’ differing opinions on whether a price cap should be implemented on natural gas imports and, if yes, how exactly this implementation should look.  While EU officials try to put on a brave face and send positive signals to the public only, the sheer number of EU members and their very different energy needs and priorities are factors significant enough to make the agreement on such an important issue difficult at best.

Once you add to these two factors several members’ open criticism of the idea of a price cap for natural gas imports, the situation becomes even more complicated, with agreement harder to come by.

“The discussion is extremely complicated because there are simply different views . . . [but] we want to work hard in the remaining days to reach an agreement,” said Jozef Sikela, Czechia’s energy minister, last week, as quoted by the Financial Times.

EU members have been negotiating the crisis management package for months now, with agreement on the gas price cap no closer in sight than it was at the start of negotiations when 15 EU members asked for it.

The European Commission has also spoken skeptically about the potential benefits of a gas price cap, but because of the number of EU members that wanted one, last week, the Commission tabled a proposal for a cap. From a certain perspective, it would have been better if it hadn’t.

The proposal set the potential cap at 275 euros per megawatt-hour: a price the Commission said would need to be a fact for two weeks before the cap kicks in. It also combined this condition with another: gas prices in Europe should be 58 euros per MWh higher than the average price for LNG on the spot market for ten consecutive days within those two weeks.

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The backlash was immediate and came from all sides. Traders and exchanges said the proposal could cause severe and irreversible harm to EU energy markets because of its focus on front-month futures only. Excessively high margin calls on the OTC market, where traders would be forced to operate under the cap was one big concern. Additional costs for exchanges was another.

Yet traders and exchange operators were not the only critics. Politicians from several EU members also declared their opposition to the cap as too high. Indeed, observers note that even when gas prices in Europe were at their highest this year, at over 300 euros per MWh, they never stayed at 275 euros per MWh for two whole weeks. The level that the Commission proposes, then, is considered unrealistically high to make the cap effective.

Spain’s energy minister, Teresa Ribera, told the FT “countries will be killed” if they had to endure gas prices at that level for that long and called the Commission’s suggestion “a joke in bad taste.” So did Poland’s energy minister, Anna Moskwa.

“The gas price cap which is in the document currently doesn’t satisfy any single country. It’s a kind of joke for us,” Moskwa said last week, as quoted by CNBC. One unnamed EU official called the cap proposal “a fake price cap.”

EU energy ministers are meeting again on December 13 to try and reach some form of agreement on the cap and other measures. Judging by the latest signs, this will be far from an easy job in the absence of an alternative proposal for gas price management.

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What this means is that discussions will continue until members agree on a watered-down version of the original proposal, as tends to happen with most controversial proposals of the Commission. A watered-down version of a price cap would do little to enhance the EU’s energy security during its toughest winter in decades.

Meanwhile, EU members need to be thinking about next winter already. For now, the gas supply is ensured thanks to stable Russian flows during the first half of the year, record-high U.S. LNG imports, and a longer-than-usual storage refilling season. Next year, however, the flow of Russian oil will be a lot weaker than it was this year, and there is no additional U.S. LNG supply readily available to fill in the gap.

It could be argued that EU energy ministers should focus on that instead of a price cap that the Commission clearly does not want to implement, and neither do members such as Germany, Denmark, and the Netherlands. Yet the gas piece problem is much more immediate for most governments in Europe, hence its place in the spotlight.

The problem is likely to remain in the spotlight for the observable future, whatever EU energy ministers manage to agree on in December—if they manage to agree on something. As the weather gets colder across Europe, it is vital for politicians to be seen to be doing something about energy prices. People are already getting angry with their electricity bills.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on November 29 2022 said:
    The proposed EU price cap on Russian gas exports is virtually impossible to achieve and will end up being discarded and thrown in a waste basket.

    The reasons are divergent views among the 27 members of the EU, differences in the dependence by members on Russian gas, absence of alternatives, shortages in the market and above all the fact that Russia will immediately halt exports to any country or group of countries implementing the cap.

    Neither a cap on Russian gas nor one on oil are viable. So it is better for both the G7 and EU to stop trying because they will disrupt the global oil and gas markets, cause shortages of gas and oil in the market and end up paying more crippling prices that they have been paying so far.

    Even if a cap on gas and oil is agreed, it will be unenforceable.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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