What the European Union is doing for the price of gas
Soaring gas and energy prices remain a major problem across Europe, and discussions to find a solution within the European Union continued on Friday at an informal European Council attended by heads of state and government from member countries in Prague participated in the Czech Republic. For months, the member states have been trying to find a common solution to calm the gas price, but the sensitivities are very different and the introduction of a cap, i.e. a limitation of the free market, does not convince everyone.
Some, like Germany, fear imposing a price cap will persuade suppliers to sell their gas elsewhere, while others fear states will have to step in to compensate energy companies. In particular, member countries are considering an Italian proposal to set a mobile index instead of a fixed cap, which seems to be gaining consensus. But unanimous decisions in Europe remain complicated and no agreement has yet been reached.
The 27 heads of state and government have already been in Prague since Thursday for the inaugural meeting of the European Political Community, a new format of international encounters promoted in particular by French President Emmanuel Macron, which extends cooperation to 17 European states outside the European Union, including the United Kingdom, Turkey and Norway and other Eastern European countries. The main topic was the sharp increase in the price of gas with all its economic consequences for the purchasing power of households and companies.
For months there has been discussion in Europe about the possible introduction of a gas price cap, also known as a price cap, either across the board or only geared towards the Russian one. Italian Prime Minister Mario Draghi, who believes that being able to cut energy bills is already a good start to halt price increases (inflation hit 10 percent in the eurozone for the first time in September).
A price cap would in practice impose a cap lower than current prices, which can save European countries but still remain convenient for suppliers. The proposal was never seriously considered due to some technical difficulties in applying it concretely and because of fears by some countries, notably Germany, that suppliers might choose to export their gas elsewhere at a higher price, ending months of efforts to find alternative to find suppliers for Russia were nullified.
Italy’s Minister for Ecological Transition, Roberto Cingolani, has said on numerous occasions that Germans are more concerned about running out of petrol than about its price. Because unlike many other European countries, they have a decent public budget and the opportunity to spend much more than others. For this reason too, Olaf Scholz’s federal government has presented a 200 billion euro plan against price increases, which has met with a great deal of criticism.
The European Commission’s latest price cap proposal dates back to early September, when it proposed capping only Russian gas. But then the subsequent approval of the energy ministers failed and nothing more was done. However, there is a group of 15 countries including Italy, Spain, Poland and Belgium who continue to put pressure on them to start talking about it again.
In a letter to leaders released on Wednesday evening, European Commission President Ursula von der Leyen responded to those countries, reiterating, albeit evasively, the need to discuss temporary “limitation of to discuss gas prices”. And that is exactly what was done in Prague.
First, a new mechanism for setting the European gas price has to be developed. The reference market in Europe is based in the Netherlands and is the Title Transfer Facility (TTF). In the European Union there are various similar markets (e.g. in Italy the PSV, the virtual trading point), but it is the Dutch TTF that sets the reference prices for the entire continent, because that is where most of the exchanges are located. Many blame speculation on the Dutch market for the high prices, but in reality many distortions stem from the specific characteristics of this market.
Compared to other international realities, the Dutch market as a whole is small compared to the total gas consumption in the European Union, where most of the raw material arrives via pipelines and is regulated by long-term supply contracts. As a result, only a few exchanges determine the price at which one buys and sells across an entire continent, which has created significant distortions. As these are relatively small volumes, fluctuations due to the movements of a few operators can be very large. This has created many volatility problems, ie sudden fluctuations, even very large ones.
With the aim of redesigning the mechanism, Italy circulated a new technical document during the gas market intervention meeting. It is no longer a question of a price ceiling, a term that is now difficult to accept for some States, but of a “dynamic price corridor”: the reference price for gas would become the average of the prices applied at international level markets that are larger and more stable than the FTT, which would be allowed a margin of fluctuation.
This would accommodate both gas suppliers who would not be subject to a fixed administered price and countries concerned about over-managed interventions.
The Italian government currently seems to be able to count on the support of the other states that have so far exerted pressure on the price cap and is convinced that the European Commission will also take the same line and thus make work easier. Germany, the Netherlands and the other previously skeptical states.
During the informal summit in Prague, leaders addressed the issue from a more political perspective. The technical details will be discussed among the energy ministers at the meeting next Tuesday and Wednesday in Prague. The European Commission must then come up with a proposal, which should include a mechanism similar to that developed by Italy at this point. And it is possible that an agreement will be reached at the European Council on October 20th and 21st, which will also be Mario Draghi’s last as Council President. Draghi said in a press conference at the end of the meeting that “something is happening in the field of energy”. Then he added that “the issues have not been discussed in great detail” because the technical details will be decided directly by the European energy ministers before the next European Council.
Another need that emerged during the meetings concerns the need to build stronger and more stable relationships with the countries supplying gas to the European Union in order to be able to obtain lower than market prices. Also in Prague, the heads of state and government also discussed energy with countries outside the European Union, which they include in the context of a new European political community.
Ursula von der Leyen insists that the price cut will inevitably be negotiated with Norway, which is now the Union’s first supplier of raw materials (which, by the way, gets a lot of money).
Von der Leyen has released a joint statement with Norwegian Prime Minister Jonas Gahr Støre stating that we “need to jointly develop a tool to stabilize energy markets and limit the effects of market manipulation and price volatility”. Speaking at the meeting, Støre reiterated that Norway will increase gas production as much as possible while looking for a solution “to bring these excessively high prices down significantly in the short and long term”.
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