According to a non-paper from the European Commission’s Directorate-General for Energy (DG ENER) obtained by EUROPE on Monday 5 September, the institution is currently examining two possible instruments for an emergency cap on wholesale gas prices.
The first way is to introduce a price limit for gas imports from Russia to limit Russian revenues from these supplies.
According to data from ENTSO-G’s transparency platform and the Centre for Research on Energy and Clean Air (CREA), Russian revenues from pipeline deliveries to Europe increased by 4% between June and July 2022, despite lower deliveries, due to higher prices.
As regards the level of this cap, DG ENER considers that it should be higher than Russian marginal production costs so that a price cap is a better option for Russia than a complete halt in flows.
In addition to its impact on Russian revenues, such an instrument to cap Russian gas prices would help to increase certainty about gas volumes and prices from Russia and limit the volatility and uncertainty associated with Moscow’s manipulation of the gas market, DG ENER states.
It continued: “The added value of this measure is mainly on reducing Russian revenues and price volatility rather than necessarily lowering EU gas prices (unless Russia would increase supplies) and should therefore be understood as a quasi-sanction measure against Russia”.
As to how to implement this instrument, the document mentions two options: - introduce legislation to set-up a maximum price cap on the gas bought by Russia (similar to the sanctions model); - create a single buyer entity that would negotiate specific volumes against specific prices with Russia.
While the former is simpler and quicker to implement, both options can be combined, the text underlines, while specifying the conditions to be met for the implementation of a price cap on Russian gas imports to be optimal.
According to DG ENER, it is therefore necessary that the EU is ready to give up Russian gas immediately and that the instrument is designed in such a way that Russia is worse off in the event of a halt to gas supplies than it would be if the price cap were respected.
Limit the cap to the most affected regions
The second instrument examined is to distinguish European regions into “red zones” and “green zones” according to their level of exposure to disruption of Russian gas supplies. A cap on wholesale transactions in the whole red zone would then be introduced in case of an emergency, subject to the prior agreement of all Member States in the zone.
Given the difficulty of predicting prices in a highly volatile environment, this cap would be dynamic and would be set with reference to the Title Transfer Facility (TTF) price, the non-paper says. As a system that registers the transfer of title to the gas delivered in the Dutch gas system, the TTF price is a reference for the rest of Europe and is also often part of the price formulas in long-term gas contracts.
According to DG ENER, prices in the red zone should also remain higher than in the green zone and be slightly higher than the TTF price in order to ensure that all available and transportable gas is actually transported to the red zone where it will be needed.
The paper develops two options. The first is a uniform price cap within and between zones.
This would prohibit the setting of a price above the cap for gas deliveries in the red zone, both for transactions within the red zone and between the green and red zones.
The second option represents an adjusted version of the first and would allow customers to trade gas allocated between Member States within the red zone at prices above the cap price.
It should be noted that the non-paper does not consider the possibility of a Europe-wide cap on wholesale gas prices, not least because such a measure would have to be compensated for if the cap is set below market prices.
Russia suspends deliveries via Nord Stream 1
On Friday 2 September, the Commission President, Ursula von der Leyen, said she “firmly believed that it is now time for a price cap on Russian pipeline gas exported to Europe” (see EUROPE 13013/2).
In the wake of this, Russian gas giant Gazprom announced an extension of the shutdown of the Nord Stream 1 pipeline (see EUROPE 13011/26), citing the discovery of an oil leak in a turbine.
“Gas transmission via the Nord Stream gas pipeline has been fully shut down until the operational defects in the equipment are eliminated”, it said in a statement issued on Friday evening, without specifying a date for the resumption of deliveries.
Rejecting this explanation, the Commission had again criticised Russia for using energy as a geopolitical weapon.
“Gazprom’s announcement this afternoon that it is once again shutting down NorthStream1 under fallacious pretences is another confirmation of its unreliability as a supplier. It’s also proof of Russia’s cynicism, as it prefers to flare gas instead of honouring contracts”, the institution’s chief spokesman, Eric Mamer, tweeted.
See the DG ENER document: https://aeur.eu/f/2y2 (Original version in French by Damien Genicot)