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    Brussels' four ways to make gas cheaper without a price cap


    September 30, 2022 - CE Noticias Financieras

     

      Brussels' reluctance to impose a cap on the price of gas that the European Union imports from third countries, both by pipeline and by ship, has not disappeared. Despite the express request of at least 15 Member States and growing pressure, the European Commission remains reluctant to move in that direction and sees the measure as "radical, extremely complicated and fraught with risks to supply". Its alternative: capping the price of Russian gas imports, negotiating better prices with reliable suppliers and extending the Iberian derogation model to other European partners to limit the price of gas for electricity production.

      All these ideas will be on the table this Friday at a new extraordinary meeting of energy ministers - the second this month - called to approve the first electricity market intervention measures: a recommended reduction in consumption of 10% on average plus a mandatory 5% at peak hours, a cap on the income of infra-marginal technologies such as renewables at 180 E/MWh, and a temporary and solidarity contribution from oil and gas companies (of 33% of their extraordinary profits). The regulation, negotiated in a record time of two weeks, introduces flexibility for Member States to apply the claimed savings as they see fit and will allow governments to maintain their national measures if they are equivalent, such as the tax on large energy companies designed by Spain or the Iberian exception in force until the end of May.

      The emergency intervention of the electricity market does not solve, however, the big problem of high gas prices and market volatility. A debate that Brussels launches this Friday with a working document with some clues but that has disappointed in many European capitals for the lack of concreteness and the lack of concrete proposals. "There are no proposals. It falls short," diplomatic sources complain. "I hope that the European Commission will listen to the ministers and from here present proposals," hopes another senior official who warns of the growing nervousness among governments due to the lack of reaction.

      Gas price cap

      The proposal to cap the price of imported gas is not among the options being considered by the European Commission, despite the express request of 15 of the 27 countries, including Spain, Portugal and Italy, in a letter sent this week. On the contrary, the document circulated by Brussels insists on presenting this option as a bad idea, complicated and difficult because a "limitation of wholesale prices in all intra-Community exchanges would require, among other things, replacing the market with a centralized system for allocating and rationing gas and financing the difference between the maximum price and the overall market price," the document states. "Countries are increasingly nervous that the European Commission is not reacting," European sources admit about a measure requested three weeks ago, at the previous extraordinary council, but which also generates resistance in northern European countries. such as Germany or the Netherlands, which consider that it could threaten security of supply and increase consumption at a time when the EU needs to reduce demand. "We buy gas from non-European countries and the LNG market is a global market so there could be a supply problem. We are also a reliable partner. It would be very strange to unilaterally decide a price at the gas cap. It is not the way to do business," diplomatic sources warn.

      Russian gas price cap

      Brussels re-emphasizes its view that Russia is not a reliable partner because it has changed the terms of contracts, stopped gas deliveries to more than a dozen countries and interrupted supplies through the Nordstream 1 pipeline. I firmly believe that we need a price cap for all Russian gas imports at a level that remains attractive for them to export to Europe," argues energy commissioner Kadri Simson. The Commission justifies this course of action because it believes it will have an impact in reducing Russia's ability to manipulate the European market, help reduce prices and reduce the Kremlin's revenues to finance its war in Ukraine.

      Negotiate prices with reliable suppliers

      Before thinking about putting price caps Brussels advocates negotiating, "within a reasonable timeframe," better conditions for piped gas and liquefied natural gas imports with reliable partners such as Norway or Algeria. "While a mutually agreed approach with reliable partners is the preferred option, the key objective for the EU is to secure lower prices for EU consumers already this winter. Therefore, the EU must be ready to introduce measures to limit prices," notes the Commission, which starts from the idea that they have to be treated "differently from Russia," Commission sources point out. "We think it would be in our mutual interest and could respond to two thirds of the supply," the same sources point out.

      LNG market intervention

      The Commission also suggests intervening in the liquefied natural gas market by negotiating better prices with suppliers and developing a new index for transactions since the Dutch TTF, which is used as a reference used by European operators, "is exposed to excessive volatility and does not capture all the dynamics of the LNG market," say the community technicians.

      Iberian derogation to the European one

      Brussels also proposes for the first time to apply at European level a mechanism similar to the 'Iberian derogation', through a "temporary European framework to limit the influence of high gas prices on electricity price formation", taking into account the experience of some partners such as Spain, Portugal or Greece, and without increasing gas consumption. One option would be to cap the price of gas in power generation at a level that helps to cut electricity prices. "The cost differential between the capped price and the market price would be borne by the electricity system within the Member States," says the Commission on a system that until now they had ruled out "Europeanizing" because of the different characteristics of the markets but now raise. "We need something that has an immediate impact on prices. Something simple, temporary and that can be applied and what we propose can be applied and have an impact", they explain.

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