Energy crisis: EU moves ahead with plans to buy gas jointly in a bid to secure lower prices

The European Union is moving ahead with novel plans to buy gas jointly in a bid to leverage the bloc’s purchasing power and secure lower prices from international suppliers.

The scheme was approved in mid-December as part of a broader raft of emergency measures to combat the energy crisis. But unlike most of these measures, the collective purchases have yet to be rolled out and yield any tangible effect for households and companies.

Brussels is stepping up the work to have the system up and running by summer when member states are expected to start refilling their underground gas storage – a concentrated push that last year sent prices to astronomical highs never seen before.

Prices have since steadily decreased and are now hovering at €47 per megawatt-hour, similar to the levels seen before Russia launched the full-scale invasion of Ukraine but exceptionally elevated compared to pre-pandemic trends.

“The price of gas in the EU remains inflated. For instance, it is almost seven times higher than in the United States,” said Maroš Šefčovič, the European Commission Vice President tasked with steering the joint procurement.

“This naturally affects Europe’s competitiveness and the cost of living for our citizens.”

The war has forced EU countries to suddenly abandon their energy dependence on Russian fossil fuels and do whatever is necessary to diversify gas suppliers, even if comes with a hefty price tag.

Liquefied natural gas (LNG) from the United States, Qatar and Nigeria, together with boosted pipeline flows from Norway and Algeria, have emerged as the leading alternatives to replace Moscow.

But these producers, particularly LNG traders, are sought-after all around the world, leading to tight supplies and steep fees.

The European Commission wants to gather all member states together in a common undertaking to buy gas and prevent competition from fuelling prices further up.

Countries will be required to pool at least 15% of their storage obligations into an electronic platform, which will then match companies with international providers according to their needs.

Both LNG and pipeline gas will be up for grabs.

Following Thursday’s meeting with national representatives, Vice-President Šefčovič said the aggregated gas demand would be between 23 and 24 billion cubic metres (bcm) spread over the next three years.

Five member states, which Šefčovič did not name, have not yet notified the volumes they wish to acquire.

In total, the bloc has the capacity to keep around 100 bcm of gas underground and a mandate to fill underground facilities by 90% before the start of next winter. The stored gas is an essential backup to prevent shortages and blackouts when cold temperatures trigger spikes in demand.

“We have to be absolutely vigilant, definitely not complacent, because we’re living in a very difficult period where we have war in Ukraine. We are in a time of very tight markets,” Šefčovič told reporters.

“We have to work with certain reserves. We have to be sure that we will not face the same dilemmas as (we did) the last year when it comes to the security of supply.”

Under the joint platform, European companies will be allowed to buy gas either individually or through consortia with other firms. The scheme will also offer the possibility of assigning one company as a “central buyer” to lead the negotiations on behalf of the others.

Brussels thinks this cooperation will help smaller and landlocked countries secure more affordable prices as they would otherwise do on a bilateral basis, although it remains to be seen how low prices will go given the tight market conditions.

“The global LNG market is expected to remain volatile due to limited volumes of new LNG becoming available, the potential rebound of the Chinese economy and drastically reduced imports of Russian pipeline gas to Europe, which helped us fill storages last year,” Šefčovič said on Thursday.

“Therefore, I believe we should make full use of the EU Energy Platform for joint gas purchasing – not only to protect ourselves against gas shortages but also to tackle high energy prices.” 

The platform will be restricted to aggregation of demand and matching with suppliers. Contracts will be actually negotiated outside of the mechanism, with a maximum duration of 12 months.

Countries, however, will only have a legal obligation to aggregate demand and will be entitled to reject the price offered by the supplier if it fails to match their expectations.