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Europe’s gas price cap options, explained

Europe’s gas price cap options, explained

by host

EU leaders meeting Friday in Prague want to lower natural gas prices before winter sets in, but political discussions on how to go about it are getting snarled in a tangle of terms, each more confusing than the last.

A plethora of proposals for an EU-wide measure, some of which contradict one another, have been jumbled together in the catchall phrase “gas price cap.” But those various proposals — whether fixed, flexible or “forked” — don’t work the same in practice and come at different costs.

That’s creating confusion over what exactly, national energy ministers asked for when they urged Brussels to come up with possible options ahead of Friday’s leaders’ meeting — and what European Commission President Ursula von der Leyen meant when she said earlier this week that the EU executive had “started work” on a “cap on the price of gas.”

There’s precious little time left to figure it out before temperatures drop: Heating season began on October 1, and gas in Europe is still trading at an eye-watering €175 per megawatt-hour (MWh). That’s nearly four times higher than a year ago — and more than 11 times the price in 2020.

Here’s a breakdown of the main measures under discussion.

Partly subsidizing gas purchases

How it works: EU countries would select a common “symbolic price” for natural gas that utilities and industry can afford to pay on the wholesale market and then foot the rest of the bill. The agreed number could be based on historical EU prices, tied to the global oil price or linked to lower gas prices in other parts of the world.

In its broadest version, the subsidy could be applied to all natural gas purchased inside the bloc — whether drilled domestically, imported via pipeline or arriving via ship at liquefied natural gas (LNG) import terminals. It could also be narrowly applied to only gas used to produce electricity, meaning heating would remain expensive but the cost of keeping the lights on would be manageable.

Pros: It doesn’t involve tinkering with the bloc’s trading exchanges or energy market rules. Buyers would still acquire gas at sky-high prices, but receive a check for the amount they paid above the agreed symbolic price — either from national governments or via a potential EU financing solution. It also ensures that global gas sellers, notably those sailing LNG tankers around the world, don’t abandon the EU in search of higher prices elsewhere.

Cons: It’s expensive. Last year the bloc consumed 375 billion cubic meters of gas, which at today’s prices would cost more than €640 billion — subsidizing even a slice of that could leave the bloc drowning in debt. It also poses problems for any gas re-exported outside the EU: Without clear rules at the border, subsidized EU-based companies could make huge profits re-selling gas at higher prices to neighboring third countries — or if it’s exported at the same low cost, the EU would be partially footing the bill for outside countries to guzzle more gas.

Who’s in favor: Germany has agreed to subsidize gas imports on a national level, dubbing it a price “brake.” In a more limited “Iberian mechanism,” Spain and Portugal are subsidizing gas burned for electricity above the symbolic price of €40 per MWh. This week, Brussels expressed openness to temporarily applying the Iberian model to the EU electricity market, in addition to discussing wider gas options.

Decreeing a maximum sale price

How it works: The EU could choose to set a hard ceiling on how much gas can be brought and sold for. If applied to all purchases, that limit would force companies to renegotiate their private supply contracts and would forbid real-time traders from bidding above the maximum price.

That price could be fixed — the so-called “rigid” cap — but it could also fluctuate, if the maximum is linked to the price of another commodity like oil, or to the price of gas in a competing jurisdiction, such as the Asian market.

EU leaders are setting their focus on lowering natural gas prices before winter sets in | Sean Gallup/Getty Image

Pros: A fixed maximum price means buyers know they won’t have to spend above the cap and sellers know how much the bloc is willing to pay, regardless of fluctuations on the global market. It could also prevent EU countries from driving up the price inside the bloc in a bid to snap up supply before neighbors do.

Proponents of a fluctuating, or “dynamic,” cap have suggested linking the EU maximum to whatever Asian rivals are willing to bid. That’s based on a geographical calculation: When prices are the same in Europe and Asia, sellers on the East Coast of the U.S. make more money shipping gas to Europe because the travel distance is shorter.

Cons: If the EU’s maximum is too low, global suppliers who can afford to sell elsewhere will do so — potentially leading to bloc-wide shortages. Competitors could also easily outbid EU buyers by bidding just above the cap. Brussels has pointed out that a uniform price within the EU would also hobble intra-bloc trading, and require a centralized authority to dole out gas in a command-and-control-style economy. Russia has also warned it would not sell to regions implementing a maximum price.

Who’s in favor: Italy and Greece have both sketched out proposals for a dynamic cap, either linked to oil or using a formula to guarantee U.S. sellers a certain profit. Belgium has expressed support for some form of dynamic cap linked to Asian rival bids. But the Commission has strongly warned against this option. Hungary and other countries heavily dependent on Russian imports are also opposed to any cap that could be used by Russia as an excuse to halt supplies.

Mix and match

EU countries have been hard at work trying to cobble together a custom solution from the above two options.

A new joint proposal from Greece, Italy, Poland and Belgium, obtained by POLITICO on Thursday, would decree a fluctuating price on all EU wholesale gas transactions — potentially tied to oil prices or linked to U.S. and Asian gas prices, so as to attract enough supply into the bloc.

Within the EU, that price would be allowed to move up or down by 5 percent — which Italy has baptized tetto forchetta, or “forked cap” — allowing gas to be traded and guided to regions on the Continent where it’s most needed.

In case of supply shortages, additional gas purchases from outside the bloc at uncapped prices could be subsidized — with stricter gas-savings requirements to avoid that import bill getting out of control.

EU leaders mulling these policy options Friday are expected to narrow down the list of desired measures, to be further discussed by energy ministers next week.

A second meeting of EU heads of government is scheduled for the end of October, with hope a final decision can be taken this month.

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