Caps and corridors: how can Europe contain gas prices?

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BRUSSELS — Leaders of European Union countries will debate whether and how to cap gas prices on Friday, after member states stepped up pressure on Brussels to cap fuel costs.

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

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Other countries are opposed, including Germany, Europe’s biggest gas buyer, and the Netherlands, which say capping prices could undermine energy security this winter.

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The Commission has also raised doubts and until Wednesday had suggested that the EU was moving forward with more limited versions of a price cap.

Here are the ways Europe could cap gas prices.

TYPE OF PRICE FOR ALL GAS

That’s what the 15 EU countries asked the European Commission to urgently propose in a letter, saying a price cap was “the only measure that will help all member states to mitigate inflationary pressure”.

European Commission President Ursula von der Leyen in a letter to EU leaders on Wednesday suggested they consider a temporary price cap while the Commission works to launch an alternative reference price to the Dutch FTT gas price .

“We should consider a price cap in relation to the FTT in a way that continues to ensure the supply of gas to Europe and all member states,” their letter said.

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He did not specify whether this limit would apply to all gas operations and import contracts linked to the FTT price, or if they are more limited in scope.

The Commission has been skeptical about a wholesale gas price cap for exchange transactions. In a paper looking at various options last week, the EU executive said a broad limit could be complex to launch, pose risks to energy security and disrupt fuel flows between EU countries.

This is because, in a supply shortage, price signals could no longer drive flows to regions that urgently need gas, while a cap also risks causing supply disruptions from foreign suppliers, according to the Commission’s document.

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

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NEW GAS PRICE REFERENCE

Although a price cap would be a temporary solution, the Commission wants to implement a more durable alternative price reference for gas in Europe.

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

Brussels says a new index is needed as 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 on its own. Its success would depend on whether the gas industry uses it.

‘CORRIDOR’ GAS PRICE

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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 importation from specific jurisdictions and not limited to specific use of natural gas,” the countries said in a document describing the “corridor,” a certain range and below the market price.

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

The price of gas could fluctuate within the range of the corridor, to continue to provide price signals that direct supply to regions that need it, the paper says, adding that it should also apply to long-term contracts linked to existing gas price benchmarks. .

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TYPE OF 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 power plant needed to meet demand, usually a gas plant. Therefore, reducing the cost of gas-fired power could reduce the overall price of power, although governments would have to compensate gas plants for the gap between the cap price and the higher market price in which they buy the fuel.

Spain and Portugal implemented a plan to do so in June, which has helped reduce local electricity prices, but at the same time increased gas consumption in Spain.

The Commission has said that any intervention to lower gas prices must be accompanied by measures to prevent an increase in gas demand when countries need to conserve scarce fuel.

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RUSSIAN GAS PRICE TYPE

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

Europe depended on Russia for about 40% of its gas before Moscow invaded Ukraine. That share has fallen to 9% as Russia has cut supplies to Europe.

Given the drop in Russian volumes, some EU diplomats said a price cap would do little to lower European gas prices and would work as a geopolitical move to reduce revenue for Moscow.

NEXT STEPS

The discussion by the leaders of the EU countries on Friday will give guidance to Brussels on what kind of measures they would support. Energy ministers from EU countries meet on October 11-12 to continue discussing gas price caps.

The Commission, which makes EU policies, has said it is ready to propose additional measures to tackle the energy crisis. Once the Commission presents proposals, the bloc’s 27 countries 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)