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European leaders politically back gas price caps

BRUSSELS – The European Union moved closer to setting a cap on gas prices on Friday after months of talks, with Germany now admitting the idea “makes sense”.

The EU has struggled with an unprecedented energy shock resulting from Russia’s invasion of Ukraine. However, so far, measures to reduce gas prices have come mainly from national governments rather than at EU level.

One of the biggest stumbling blocks had been whether to impose a cap on gas prices, with Germany and a few others wary of the potential market repercussions of the policy.

German Chancellor Olaf Scholz said in Berlin on Thursday that this “always carries the risk that producers then sell their gas elsewhere”.

However, after negotiations with his European counterparts that dragged on into the early hours of Friday morning, Scholz agreed to go ahead with the measure – albeit with caveats such as the need to design it from so as not to increase consumption.

Belgian Prime Minister Alexander de Croo told CNBC on Friday that Germany had “legitimate concerns”.

De Croo said the heads of state listen to each other and seek to iron out any differences. “It’s a big step forward,” he added.

Before their rally began, expectations of the 27 leaders coming together on a price cap were very low.

German Chancellor Olaf Scholz: We are Europe's biggest supporters

Luxembourg Prime Minister Xavier Bettel noted that there were “lots of taboos”, but they were resolved at the summit.

“We didn’t decide everything, but we gave homework [to their energy ministers] and we were able to agree on the to-do list, which is…a big step,” he told CNBC.

“Dynamic Price Cap”

The political backing of the 27 heads of state means that, in the coming weeks, EU energy ministers and the European Commission ꟷ the executive arm of the EU ꟷ will be working on the technical details of how a “corridor temporary dynamic pricing” will work.

This should establish a flexible range for gas prices, but more specific details are expected in the next two to three weeks.

After that, Belgian de Croo said the implementation could be “pretty quick”.

Regardless of the details, the cap is only a temporary policy that should not be in place once a second benchmark has been established.

Currently, European natural gas prices are reflected via the Dutch Title Transfer Facility. But EU leaders have agreed that this benchmark no longer reflects the reality that most of them receive liquefied natural gas rather than pipe gas, and so they plan to put in place a second benchmark. by the end of the first quarter of 2023.

Gas prices in Europe have soared following tensions with Russia, which was once the main seller of natural gas in Europe.

At their peak, prices soared above 340 euros ($332.6) per megawatt-hour in late August. The contract was trading at around 30 euros per megawatt hour in August 2021.

Markets appeared to have welcomed the outcome of the EU leaders’ meeting with prices falling from around 127 euros per megawatt hour on Thursday to 110 euros per megawatt hour in Friday afternoon trading.


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