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Europe is confused between reducing gas prices and ensuring security of supplies

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European Union countries are still divided over setting a ceiling for gas prices, amid fears of harming the security of supplies in the old continent. Over the past weeks, Europeans have fluctuated between fear of rationalizing consumption and fear of seeing prices rise to catastrophic levels, according to what was confirmed by the French newspaper “Le Monde”. The European Union energy ministers, at their meeting in Brussels – Tuesday (December 13) – struggled to agree on a ceiling for gas prices, according to information monitored by the specialized energy platform. Amid expectations that no compromise will be reached, European heads of state and government will be able to address again the dilemma of the gas price cap, at their meeting in Brussels on Thursday, December 15th.

 

Russian G crisis

Since the start of the war in Ukraine on February 24, Europeans have known that for a long time they will not have access to the cheap energy that Russia has supplied them with, and that they may run out of gas. Until this summer, the EU27 countries were keen to maximize gas storage levels, even if it meant paying a heavy price, in order to allow their countries to go through the winter of 2022-2023 without Russian gas. Germany, whose powerful industry relied heavily on Russian gas, took the largest amount of gas on the market this summer, driving up prices for its European partners. Consequently, megawatt-hour inflation in a number of European countries has become the main concern.

 

Split over gas price cap

The 27 European Union countries are seeking to reach an agreement on a ceiling for gas prices, but the countries are deeply divided into two camps. On the one hand, laissez-faire supporters – led by Germany – fear that capping gas prices will alienate suppliers and increase consumption. A European diplomat said sarcastically: “If there is no more gas, we do not care if it is cheap,” according to what was reported by “Le Monde”. The European Central Bank warned – on December 8 – that “the current design of the proposed mechanism may, under certain circumstances, jeopardize financial stability in the euro area.” In the other camp, many countries – including Italy – fear the economic and social consequences of accelerating inflation, given that they do not have the Berlin budget resources to support the purchasing power of households and the competitiveness of companies. But these countries also know that they cannot risk Germany running out of gas, because their economies are so interconnected.

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European proposal to control prices

On November 24, the European Union countries reached a political agreement on several texts that, once in force, could also limit excessive price increases, amid divisions over the gas price cap. The European Commission has proposed a price cap as the EU’s latest response to the economic turmoil caused by Russia cutting gas shipments to Europe this year (2022), which has led to higher energy prices. The agreement provides for the implementation of the cap if the TTF front-month contract exceeds €275 ($289.61)/MWh for two weeks, and if the contract is €58 ($61.08) higher than the reference price for liquefied gas for a 10-day period. Consequently, the legislative proposal aimed at accelerating the issuance of permits for wind farm projects and other solar energy facilities, and thus the intensification of renewable energy sources, was not adopted. The 27 European Union countries agreed only to organize joint purchases of gas by the Europeans, in addition to solidarity between the countries of the group in the event of running out of gas in one of them.

 

Continuing European division

European Union energy ministers meeting in Brussels on Tuesday night struggled to agree on a cap on gas prices, after months of internal wrangling over whether the measure could ease Europe’s energy crisis. Divisions between countries meant that the meeting passed its scheduled end in the early afternoon, according to Reuters. “The two main issues are the level and scope of the price ceiling,” said a senior EU diplomat, adding that not all countries were open to a deal and that Germany was among the opponents. EU officials stressed that some countries supporting price caps are not satisfied with the latest text. If no deal is reached, the discussion is likely to escalate to a meeting of EU leaders on Thursday (15 December), before energy ministers meet again next week.

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Prospective transaction terms

Any deal could be based on technical details, including how high the price cap is, which gas contracts apply to it, and guarantees, such as enabling the EU to suspend the cap immediately if it has unintended consequences. In search of a middle ground, the Czech Republic, which holds the EU’s rotating presidency, has drafted a new proposal to implement the cap if prices exceed a range of €200-220 ($212.5-233.7) per MWh over 3 to 5 days. On a front month contract at TTF. The contract price should also be 35 euros ($37.19) higher than the reference price based on current LNG price assessments. The proposal is lower than the maximum price of 275 euros ($292.17) per megawatt-hour proposed by the European Commission, which is still under review on Tuesday.

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