Ursula von der Leyen presents first-ever EU cap to curb excessive gas prices

Ursula von der Leyen has presented the layout of the first-ever EU-wide cap to rein in surging gas prices, but the measure will apply only in cases of extreme volatility and speculation.

The European Commission President also put forward plans to set up joint purchases of gas and establish solidarity rules among member states to cope with potential shortages.

The proposed cap will act as an emergency tool and be triggered when gas prices across Europe’s trading hubs surpass a certain threshold, which is yet to be defined.

The measure falls short of the forceful intervention advocated by some EU countries, including Italy, Greece, Poland and Belgium, who had called for a broader price cap on all gas imports and all gas transactions.

A more targeted price cap on the gas used for power generation was equally excluded from the Commission’s new package, as the executive continues to examine the potential risks of this measure.

“We believe it merits to be considered for introduction at EU level,” von der Leyen said, leaving the door open.

Here’s a round-up of the latest energy measures proposed by the European Commission.

A cap to tame speculation

Brussels intends to set up a new mechanism to contain excessive volatility at the Dutch Title Transfer Facility (TTF), Europe’s leading trading hub, and other similar venues.

The TTF is a virtual marketplace where providers and clients trade gas supplies. Although not every company uses the TTF, its prices serve as the main reference for Europe’s entire energy sector.

Since Russia launched the invasion of Ukraine, the platform has seen abrupt ups and downs in gas prices, as uncertainty over security of supplies fuelled speculation.

In August, the TTF reached an all-time record price of €339 per megawatt-hour, driving electricity bills along the way. After the peak, prices began a steady downward trend, hitting a three-month low in early October.

Monday closed at €128 per megawatt-hour.

The proposed cap will act as a ceiling and effectively limit the maximum gas price at which the TTF is allowed to trade. It will be a dynamic cap, rather than fixed, and will mimic market trends.

The actual prince range is still up in the air and will be discussed among capitals in the coming days. Since the cap will be triggered only in situations of extreme volatility, the range is expected to be wide.

In parallel, the European Commission plans to establish another cap to contain price spikes of energy derivatives, the financial assets that companies use to secure fuel supplies in the medium and long term.

“Having a price cap as a backstop solution in case of an emergency situation is a good way forward that can bring some calm to the market, as extreme volatility will not be tolerated any longer,” Simone Tagliapietra, a senior fellow at Bruegel, told Euronews in reaction to the announcement.

A new market, but just for LNG

The European Commission says both caps will be a temporary solution while the EU works to build a new trading hub, distinct from the TTF, that will be dedicated solely to liquefied natural gas (LNG).

Despite being expensive, LNG has become the go-to commodity to replace Russian pipeline gas. Since January, the EU has been breaking records of LNG imports, mainly from the US, as a period of economic slowdown in China frees up international competition.

But this huge LNG boost has not been properly reflected at the TTF because this hub continues to be overly influenced by pipeline supplies and is therefore vulnerable to Russia’s manipulation.

A brand-new benchmark will offer “fairer” and more “transparent” LNG prices, the Commission says.

The goal is to have the LNG hub up and running by April. However, its success will depend on the reaction of market operators, who might reject or embrace the new platform.

Joint purchases

Also by April, the Commission intends to have in place a proper system that will allow member states to buy gas supplies as one single client.

“We know that we are strong when we act together,” von der Leyen said. 

The idea of joint procurement has been touted since mid-2021 but gained traction in recent weeks as countries rushed to fill their underground stages and drove prices further up.

The next filling season is projected to be arduous and expensive because the EU will no longer rely on Russian pipeline gas. The Commission estimates there is a gap of “un-contracted” gas demand of up to 100 billion cubic metres (bcm) – around 25% of what the EU consumed before Russia launched a war.

Joint procurement could help bridge the gap and ensure all countries, regardless of their purchasing power, have access to gas supplies at affordable – or at least tolerable – prices.

As a first step, member states will be asked to pool their gas demand to identify their main needs and seek more attractive offers from international suppliers.

Then, on a voluntary basis, European companies will be permitted to join forces as a consortium and buy gas collectively, in line with competition rules.

Russia will be excluded from the joint procurement.

At the same time, the European Commission will intensify bilateral negotiations with its main suppliers, such as the US, Norway, Canada and Azerbaijan, to secure lower tariffs.

Solidarity rules

In its latest package, the Commission urges member states to sign so-called solidarity deals between each other. These agreements allow gas to flow across borders from one country with enough gas to another one suffering from acute shortages.

As of today, out of 40 possible solidarity deals, only six have been signed.

The Commission proposes default solidarity rules that will automatically apply in all the cases where a deal is not in place. Solidarity will be extended to ensure critical gas-fired power plants keep running and to facilitate the distribution of LNG supplies across the bloc.

The rules will compel neighbouring states to respond to a request of help within 12 hours and deliver the necessary supplies within three days.

The assisted country will have to paid a financial compensation based on average market prices.

Financial support

On top of these exceptional market instruments, the Commission is proposing measures to provide greater financial support for companies facing liquidity issues.

EU rules for state aid will be amended to ensure governments can inject the necessary funds into businesses that face bankruptcy or insolvency.

The threshold for energy derivatives will be raised from €3 billion to €4 billion while the list of eligible assets will be expanded to include non-cash collateral. This will alleviate the pressure for energy companies who need to secure expensive supplies for the medium and long term.

Notably, the Commission plans to turn nearly €40 billion in cohesion funds, which are traditionally used to finance development projects in poorer regions, into economic support to help vulnerable households and SMEs under stress.

The new energy package will be discussed by EU leaders at a two-day summit later this week and further fleshed out by energy ministers on Tuesday.