EU leaders fail to agree on price on gas but vow to continue talks

EU leaders have failed to reach an agreement on a continent-wide cap on gas prices, which continue to be alarmingly high as Russia’s invasion of Ukraine disrupts the markets.

Making matters worse, Gazprom, Russia’s leading energy supplier, has cut or severely limited gas flows to 12 member states, raising the spectre of gas rationing by winter time.

“The root cause of our problem is our dependence on fossil fuels, which we must get rid of,” said Ursula von der Leyen, the president of the European Commission, at the end of the two-day summit in Brussels.

“There is a lot on the move to really diversify away from the Russian gas to other trustworthy suppliers,” she added, naming the US, Norway and Azerbaijan as alternative partners.

Italian Prime Minister Mario Draghi arrived in Brussels with the intention of pushing forward his own proposal for an EU-wide limit on gas prices, but didn’t manage to get the backing of his peers.

So far, only Belgium and Greece have expressed support for the project, while Spain and Portugal have already established a temporary cap of €40 per megawatt across the Iberian Peninsula.

“The major objection [from other countries] to a cap on gas prices is the fear that Russia will cut supplies,” Draghi said. “But there is no point since supplies are already being cut.”

Draghi said Germany and the Netherlands, two countries that have been staunchly opposed to the move, have become more “open” to the idea.

German Chancellor Olaf Scholz, however, didn’t endorse the proposal while he spoke to reporters at the end of the summit. The sudden drop in Russian flows has forced the German government to activate the second phase of its three-stage emergency plan, warning that storage targets for winter are at risk.

As a compromise, EU leaders tasked the Commission to come up with a new plan to curb rising energy prices “including the feasibility of introducing temporary import price caps where appropriate.”

The 27 also vowed to coordinate their national measures against soaring inflation and avoid the self-centred and chaotic approach that characterised the initial months of the pandemic.

Von der Leyen said her executive is currently reviewing the contingency measures of each member state in case of a new drop in Russian flows and urged capitals to consider what impact their national instruments might have on their neighbours.

“We are working on a common European emergency demand reduction plan with industry,” she said. “I will present this plan in July to the leaders. There will not be a return to cheap fossil fuels.”

‘Quite a task’ ahead for the bloc

During her final remarks, President von der Leyen admitted the EU faces “quite a task” to replace the 155 billion cubic metres of gas it bought from Russia last year.

“We hope for the best and prepare for the worst,” she said.

Once again, the Commission chief also opened the door for a reform of the EU’s wholesale electricity market, which today works on the basis of marginal pricing, also known as a “pay-as-clear market”.

Under this system, all electricity suppliers – from fossils fuels to wind and solar – bid into the market and offer energy according to their production costs, the Commission explains. The bidding starts from the cheapest resources – renewables – and ends with the most expensive ones – usually natural gas.

Since most EU countries still rely on fossil fuels to meet all their power demands, the final price of electricity is often set by the price of coal or natural gas. If gas becomes more expensive, electricity bills inevitably go up, even if clean, cheaper sources also contribute to the total energy supply.

In recent months, countries like Spain, Portugal, France, Italy and Belgium have complained the current system creates an unfair “contagion effect” that wipes out the input from renewables and nuclear power.

Von der Leyen said her team will examine if the marginal pricing rules are still “fit for purpose” and explore the feasibility of decoupling gas from electricity prices.

In parallel to the ongoing efforts to diversify suppliers and sign new gas deals, she stressed households and companies should make an effort to cut down demand and save energy.

“If few reduce two degrees in our heating, we can save the whole deliveries of Nord Stream 1,” von der Leyen said.

EU leaders will have a chance to discuss the new plans to reduce demand and reform the market in late October, when the next summit is scheduled to take happen.

“If there’s an emergency, we’ll meet before then,” Draghi said.