How the EU Commission envisages gas price caps and profit absorption on the electricity market

On Friday, the economic and energy ministers of the EU member states will hold a special meeting to discuss a possible intervention in the gas markets. The ministers are also expected to vote on a gas price cap.

In a joint letter from the economy and energy ministers from 15 of the 27 EU member states, they called on Energy Commissioner Kadri Simson to convene the special meeting. The ministers asked the commissioner to prepare a proposal for an EU-wide gas price cap by Sept. 30 and to have the Council of Ministers discuss it by then. German Economics Minister Robert Habeck is not among the signatories of the letter.

A triad of solutions

The Commission responded to the request of the energy ministers and has worked out possible interventions in the gas market. In an ad hoc meeting on Friday, the Commission has let the ministers decide on a triad of measures: Reduced prices, consumption reduction, and solidarity-based distribution of energy within the EU, according to the draft available to pv magazine Germany.

First and foremost, this includes the desired price cap on imports of pipeline gas and liquefied petroleum gas. If the offer price on the world markets is higher than the price cap, the member states must provide a pot of funding to pay the difference. The funds for this are to be raised by all member states.

“A gas price cap – that is, a legal maximum price for gas on the energy exchanges – is exactly the wrong approach and the direct route to gas shortages,” Lion Hirth, professor of energy policy at the Hertie School in Berlin and managing director of the consultancy Neon, told pv magazine Germany. “Why? The industry would roll back all its savings efforts and burn more gas again, storage facilities would run dry, and policymakers would have to respond with forced shutdowns of plants. Nobody can want that.”

Capping import prices is unlikely to be an easy task, as the EU Commission has indicated. The increased imports of liquefied gas that have helped the EU this year have come at a price. European demand for liquefied gas next year is between 130 and 140 billion cubic meters. That exceeds global capacity increases in 2022 and poses real problems for the EU.

However, there will be no such thing as just cheaper gas for everyone under the Commission's proposal. The greater the intervention in the gas price, the stronger the measures for reduced consumption and European solidarity-based distribution must be. Consequently, the ministers are also to discuss what further reduction measures are necessary.

To further depress energy prices, the Commission has already adopted a proposal in the case of electricity on Sept. 14, according to which the “extraordinary” profit revenues from some technologies will be skimmed off and will benefit consumers. The proposal also includes a solidarity contribution on profits to be paid by fossil fuel extraction companies. In addition, member states will be free to cap consumer electricity prices for vulnerable households and medium-sized businesses.

“In the electricity market, the EU is essentially about skimming profits from electricity producers and distributing them to affected consumers,” Hirth says. “In principle, this is a sensible crisis measure and can work – if it is implemented properly. The EU's latest proposals have been problematic in many places, so it is feared that electricity prices will end up rising, gas consumption will be driven up, or even system stability will be at risk. Of all the problems, the most fundamental is the meaningful consideration of forward marketing and long-term contracts.”

In this context, the EU Commission is prepared to discuss a system in which the gas price in power generation is additionally capped. This is to prevent the gas price from influencing the electricity price to an excessive extent. By reducing the gas price in other sectors to a lesser extent, if necessary, incentives to save could remain in place.

If the price no longer indicates scarcity, rationing will have to take place. The ministers are also expected to discuss a possible EU-wide organization for the purchase and auction of gas. At this point, the Commission points out that when the price of gas in Europe reaches the new cap, the level of which has yet to be negotiated, demand effectively exceeds supply.

At such times, gas within Europe would have to be rationed by the authorities. This would require the creation of a new authority, to which there is no comparable organization in Europe, as the Commission further admits. At this point, there is also clear talk of “curtailment”, i.e., limiting energy.

With these measures, the Commission wants to reduce Russia's influence on the European gas market. Another goal that the Commission has set itself is to lower consumer prices for gas. In addition, the Commission wants to bring more security to the energy markets and avoid excessive price volatility, which is not guided by demand-supply principles.

Caps and circuit breakers

In concrete measures, the EU Commission speaks of a plan to fill European gas storage facilities. In addition, there is to be a guarantee that all member states could have access to the gas volumes in an emergency in order to supply vulnerable consumers and critical industries. This also includes that the member states are allowed to regulate and limit consumer prices for gas, for vulnerable households, and medium-sized companies on their own.

The Commission is also targeting gas suppliers with their own production of raw materials. The distortions in the market make it possible to sell to such companies at unprecedented returns, which would be far above the marginal costs of gas production. This threatens the EU economy. This is where the Commission suspects market manipulation.

The Agency for Cooperation and Energy Regulation (ACER) could be given further powers in this move. However, the Commission's current communiqué does not yet name these powers. One of the Commission's proposals to prevent enormous price distortions on the European market is the use of disconnectors to separate the grid if energy prices change significantly.

No more gas

The loss of Russian imports and the reduced generation capacity of the French nuclear power plant fleet are keeping gas prices above the €200 per megawatt hour level. European industry has been hit hard by the prices. Compared with the previous year, industrial demand for gas fell by 30%.

Some of this was due to process optimization and efficiency measures. But a significant part was also because production was downsized or stopped altogether in some sectors. Against this backdrop, the Commission cautions that there must be a “rapid and coordinated EU-wide response” to high gas prices to “avert lasting social and economic damage.”

Between January and August this year, 39 billion cubic meters less gas flowed into Europe. A drop of 37%, according to the EU Commission. From Russia alone, 43 billion cubic meters are missing. In previous years, Russia supplied around 40% of European gas consumption. This year, it is only nine percent.

However, the EU was able to partially cushion the effect with a 56% increase in liquefied gas imports, or 28 billion cubic meters. Imports from other pipelines, such as North Africa, also increased by 17 billion cubic meters. The EU was able to compensate for the loss of Russian gas imports. The EU gas storage facilities are 86% full. That is 15% more than in the previous year, according to the Commission letter. However, for the next filling phase starting in April 2023, less gas will be able to be imported than this year.