Why the EU is Moldova’s only option in Russian energy crunch

Good morning and welcome to Europe Express.

Now officially an EU candidate country, Moldova is staring into an icy abyss as it fears Gazprom could again turn off the taps next month. We’ll look at what the bloc’s eastern neighbour will need to bridge the winter and why last year’s experience with insufficient EU assistance should not be repeated.

Over in Strasbourg, it’s State of the Union day, with European Commission chief Ursula von der Leyen having made some latest amendments to the energy proposals. We’ll bring you the latest on the draft proposals (and on what they have left out).

And in Germany, investor sentiment has dropped to financial crisis levels, as fears of recession grow.

Neighbour in need

As EU governments bicker over how, why and whether they can even impose a price cap on gas, they may want to spare a thought for neighbouring Moldova, writes Henry Foy in London.

The EU accession candidate, squeezed precariously between Romania and war-torn Ukraine, estimates it will need crisis supplies from the EU of up to 300mn cubic metres of gas to make it through the winter, according to a document sent to EU energy ministers and seen by Europe Express.

Accessing EU storage and “interconnection capacities will be critical,” to weather the cold, the document says, adding that it will need an additional €750mn to support its poorest — a figure that’s roughly equivalent to 7 per cent of the country’s gross domestic product.

While a tiny proportion of the EU’s total needs — and current capacities — Moldova’s plea for gas highlights just how vulnerable many states are this winter, and how difficult it could be to share out the limited amount stored if Russia really does turn off all the taps at some point between now and springtime.

Moldova, which relies on Russia for all of its gas needs, required EU support last winter when Gazprom cut supplies by more than a third in a bid to force its government to abandon its pro-western policies. It says it expects Russia to restart “disruption” to its gas supplies from the end of October.

After a tepid response from the EU last year, Chisinau caved into Gazprom’s demands and signed up to a five-year contract in return for concessions on not rushing to align its legislation with the EU. But given the current climate, it’s unclear how long Russia will keep honouring its contract.

Given that the contract with Gazprom is a variable-price one, Chisinau is already paying almost four times as much for its gas this month than it did in September last year, and inflation is approaching 35 per cent.

Moldova wants to participate in the EU’s joint Energy Purchase Platform, but as it admitted to the bloc’s energy ministers in the paper, it “simply cannot afford to pay EU market prices”.

A sobering reminder to Brussels that as it calculates plans to make it through the winter, there are others to think about who also need support. 

Last-minute changes

A flurry of draft documents and a meeting of EU energy ministers later, several key changes have been made to the European Commission’s energy crisis rescue plan, writes Alice Hancock in Strasbourg.

The plan will be presented by commission president Ursula von der Leyen in her State of the Union address in Strasbourg today — and here are a few items to note from the latest draft seen by Europe Express:

• A cap on the revenues of non-gas electricity generators is likely to be set at or near €180/MWh, less than half the current market rate for electricity but still far higher than consumers were paying last year. A change from previous drafts is that Brussels wants to extend the cap beyond spot markets and apply it to futures contracts and power purchase agreements, long-term energy contracts generally used for renewables. This stops companies simply shifting to longer contracts to avoid the cap (and generates more revenues) but will prove legally tricky if contracts need to be broken open in order to apply the new rules.

• A “solidarity contribution” will be applied to the profits of gas and oil majors that are more than a fifth above their average profits between 2019 and 2021 at a rate of 33 per cent. This is to ensure that renewable energy isn’t seen to be unfairly targeted by the levies.

• A mandatory cut of 5 per cent to electricity demand during the 10 per cent of busiest peak hours will also be included but member states will be free to choose how that target is achieved.

• Most notable by its absence is a cap on the price of gas. Disagreement among member states at last Friday’s energy ministers meeting over how it would be applied and on which it will be applied — Russian gas, pipeline gas or all imports including liquefied natural gas — has left the proposal on ice for the moment.

Even though numbers have been set out, capitals that have already put in place measures such as windfall taxes to ease the crisis will largely be allowed to keep their current systems intact. Some in industry have said that this could result in the patchwork of measures that, by having an EU-wide plan, the commission had been aiming to prevent. Others, such as the steel industry body, have simply said that the plan was too vague.

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German gloom

Investor sentiment in Germany has dropped to levels not seen since the 2008 financial crisis, writes Martin Arnold in Frankfurt. This reflects mounting expectations that Russia’s squeezing of gas supplies and surging inflation will drag Germany into recession.

The ZEW Institute’s investor expectations index about the German economy has fallen 6.6 points to minus 61.9, its lowest level since October 2008, when Lehman Brothers collapsed. When asked about current economic conditions, investors were even more downbeat, with the survey marking a 12.9 point fall to minus 60.5. Both indicators are worse than what economists were estimating before the release.

“The prospect of energy bottlenecks in winter makes the expectations for large parts of German industry even more negative,” said Achim Wambach, president of ZEW, a think-tank. “Added to this is a less favourable assessment of growth in China.”

Economists have been slashing their estimates for growth in Germany and the wider eurozone, while raising their inflation forecasts and warning that an end to Russian energy supplies will erode household purchasing power and hit industrial production.

However, European wholesale gas prices have fallen more than 45 per cent from last month’s record levels, providing some relief for companies and households even if energy costs remain well above levels a year ago.

Claus Vistesen, an economist at Pantheon Macroeconomics, said the ZEW survey was “likely a bit too pessimistic compared to the very recent rebound in risk assets, linked to the fall in gas prices and, it seems, news of Ukrainian success on the battlefield”.

What to watch today

1. EU commission chief Ursula von der Leyen gives her State of the Union address in Strasbourg

2. EU General Court to rule on Google’s appeal against commission’s fine in Android case

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