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EU plans emergency brake on gas prices amid Russia presure
Energy

EU plans emergency brake on gas prices amid Russia presure

3 min. 22.11.2022
European Commission is proposing a cap level of €275 per megawatt-hour, more than double current levels of €120
Photo credit: Marc Wilwert

The European Commission has proposed an emergency brake on natural gas prices way above current levels, as it seeks to prevent more damage to the economy from Russia’s tightening squeeze on energy supplies.

After months of wrangling and divisions within the bloc, the commission proposed a cap level of €275 per megawatt-hour. That’s well above current levels of about €120, but below the highs the continent suffered in the summer. 

It will only be activated if strict conditions are met - an apparent attempt to see off opposition from countries that have long opposed any cap on market prices because of the risk it may make it harder to secure gas from new suppliers.

“It is not a silver bullet but a powerful tool we can use when needed,” Energy Commissioner Kadri Simson told reporters. “The mechanism is carefully designed to be effective, while not jeopardising our security of supply, the functioning of EU energy markets and financial stability.”

The proposal still needs approval from national governments but comes after months of lobbying by some member states to act to rein in energy costs that have proved ruinous for swathes of the European economy. While prices have eased in recent weeks, Moscow threatened on Tuesday to further squeeze gas flows to Europe, raising the prospect of another spike in prices. 

Prices jumped on the news from Russia earlier, and extended gains later on Tuesday.

The proposed tool will be used if futures on the Dutch Title Transfer facility exceed €275 for two weeks and the gap between TTF and liquefied natural gas prices is greater than €58 for 10 trading days. 

On tenterhooks

At the heights of the crisis in the summer, the price didn’t stay above €275 for two weeks, suggesting it would not have been activated had it been in place then. Simson said the mechanism was designed with the idea that “extreme” situations seen earlier this year “might come back.”

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Traders and policy makers are on tenterhooks to see if Russia will completely cut off its last remaining gas pipeline flows to western Europe via Ukraine. It said on Tuesday it would curb supplies further from next week over a spat about flows to Moldova. 

While Europe has filled its gas stores and mild weather has made the fall easier than feared, the continent now faces the prospect of having to fill up its storage for next winter without any Russian gas at all. The focus is now shifting to next year.

Slow start

Europe has been split on how to tackle the crisis and has struggled to come up with measures all members can get behind. As the bloc hesitated, Germany moved ahead with its own program to cushion consumers, angering neighbours who called for a united approach. 

The EU has already moved to curb demand - with mostly voluntary targets - and has designed measures so that governments can use windfall taxes on companies to ease the burden on households. But it had so far failed to implement any kind of cap despite months of summits and negotiations.

Nations led by Italy, Poland, Greece and Belgium demanded action by the commission before a decision on a broader package to rein in soaring gas prices scheduled for Thursday. The bloc’s heads of government last month unanimously called on the executive to propose measures including a temporary “dynamic price corridor” on gas transactions.

The commission - which drafts legislation in the bloc - has been aware of the risks that capping prices might pose to the security of supply, just as nations are seeking to replace Russian gas with other sources. Germany has also voiced such concerns.  

The proposal is set to be first discussed by energy ministers at their emergency meeting in Brussels on Thursday. National governments have the right to propose amendments to the regulation.

©2022 Bloomberg L.P.


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