An EU gas price cap in name only?

08 Dec, 2022

On 22 November, after months of discussions, and much pressure exerted by EU countries, the European Commission released its proposal for a gas price cap, entitled “Regulation establishing a market correction mechanism to protect citizens and the economy against excessively high prices”. But was it worth the wait?

The proposal’s price cap per megawatt-hour is set at €275, well above the current price of gas. It also contains numerous get-out clauses, most notably that the price remains above the set level for at least two weeks (even longer than the price peak experienced this August). Indeed, one may wonder whether the Commission really wants the cap to ever come into play. There can be little doubt the Commission proposed the cap solely to placate certain Member States, while itself being firmly opposed to the idea.

Introducing a cap on gas prices has been one of the more contentious measures amid a severe energy crisis in the wake of Russia’s invasion of Ukraine. The Commission proposal serves to underline the divisions between EU countries, pitting the long-standing advocates of a cap against the sceptics. While countries like France believe a cap to be a distraction that targets the symptoms without seeking structural solutions for the underlying issues fueling the energy crisis. In other words, the French would like the priority to be on the re-design of the EU electricity market.

Since the beginning of the war in Ukraine, the European Commission has put forward temporary emergency measures, to be replaced by a proposal for a re-design of the EU electricity market. The Commission will reveal its proposal in February or March next year. It is expected to focus on reforming the market, ensuring lower-cost renewables and low-carbon technologies, and delivering cheaper bills to consumers while decoupling electricity and gas prices.

EU divisions, a recurring story

Member state divisions at the height of the present energy crisis are no new phenomenon. Energy policy has long been a much-guarded national competence and given different national energy mixes, in particular different degrees of reliance on Russian fossil fuels, reaching a consensus was always going to be elusive. One may recall that back in May, after weeks of negotiations mostly stalled by Hungary, EU leaders reached a political compromise to ban seaborne imports of Russian oil by 5 December.  Last week, in coordination with the G7, EU countries finally agreed on an international price cap for shipments of Russian crude oil set at $60, timed to coincide with the EU ban on seaborne Russian oil imports. Since the beginning of the war, the European Commission has also been heavily criticized, and rightly so, for pumping out half-baked proposals, not consulting adequately with Member States, and instead opportunistically trying to arrogate power to itself.

Divisions between member states are expected to worsen as Europe’s economic outlook gets bleaker. Energy policy has always been contentious, particularly when it comes to gas, with some countries’ economies, most notably Germany’s, heavily reliant on cheap Russian gas. Indeed, back in April the chief executive of BASF, a leading German chemicals company, claimed that “renouncing Russian gas would destroy our entire economy”.

So, what’s next?

The European Commission has made it clear that the ball is now in the EU Member States’ court to reach a deal. While expectations of an agreement may be low, one can expect that a compromise deal will be agreed upon. By tying the fate of this proposal to the much less contentious “Regulation on joint purchasing of gas” and “Regulation on accelerated permitting of renewable energy projects”, Member States long supportive of a gas price cap are hoping to increase the chances of a deal being reached. Yet the impact of the joint purchasing proposal will likely be negligible, given the unambitious level of 15% of 2023 gas needs to be procured via a centralized platform. But perhaps most importantly, EU countries do not want to be seen to be kicking the can further down the road and will want to send a positive signal to the markets by formally adopting the three regulations. Disunity at a time of war on the European continent is a look all sides are keen to avoid.

With EU sanctions on Russia having been progressively strengthened since the invasion of Ukraine, the high price the EU has been paying for Russian gas is an issue that could no longer be overlooked.  But one thing is clear: when it comes to energy policy, Europe would appear to be as short of unity as it is of gas. There is, however, now a window of time in which to negotiate a compromise deal. EU energy ministers are to descend once again on Brussels on 13 December for what is referred to as an “extraordinary meeting”. Whether discussions yield anything extraordinary remains to be seen.

This article was written by Zach Burnside, who advises clients on EU political, policy and regulatory developments with a focus on the energy sector.

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