In an emergency, the EU Commission would like to introduce a price cap for natural gas

Brussels is having a hard time with the high energy prices. Although these have recently declined somewhat following a high due to the accelerated replenishment of natural gas reserves in the EU, they are still at a comparatively high level.

They also dragged inflation up with them. Politicians from all 27 EU member states want to take action and do something for their citizens and against their concerns. At the same time, however, the ideas for possible measures differ widely and drastic consequences threaten with far-reaching market interventions.

A dynamic price cap

On Tuesday, the EU Commission in Strasbourg has another Package of emergency measures presented. This is based not least on talks between the 27 EU heads of state and government in Prague, where an informal summit took place a few days ago.

Commission President Ursula von der Leyen has given in to the pressure and is proposing an upper limit for natural gas prices, a so-called price cap. However, this should not be static and fix a certain maximum price, but develop dynamically. However, if market participants wish to trade natural gas at the Dutch trading point Title Transfer Facility (TTF) at a price above the cap, the transaction would not be permitted. However, it is still completely unclear how this price cap will be determined and how it will work.

This corrected TTF price could also be prescribed for other trading venues in the EU. It would be introduced if necessary, writes the commission, and the cap would only apply temporarily. Brussels wants to limit “extreme price volatility” and prevent “excessive” prices.

In addition, there are measures against volatilities in intraday trading on derivatives exchanges. Additional so-called circuit breakers, i.e. emergency breaks, are intended to interrupt panicked reactions and thus ensure calmer pricing.

However, the question arises as to what extreme price volatility is and when such emergency breaks are necessary. All of this threatens to confuse pricing more or less arbitrarily.

In the EU, roughly speaking, only around a third of natural gas supplies are traded on spot markets such as the TTF. The suppliers sell two-thirds of the quantities via long-term contracts. However, these are indirectly influenced by the TTF market because they often use the TTF prices as a reference. However, if only the stock exchange is affected, traders could try to conclude more contracts outside of these structures and would thus escape this price cap.

Brussels also wants to lower the TTF using a kind of accountant trick. The TTF is based on natural gas prices, which are delivered through pipelines from Norway and Russia, for example. But with the Ukraine war, many European consumers had to switch to liquefied natural gas (LNG). The Commission is convinced that if there were a separate price index for LNG, it would be lower than the TTF. However, it is not clear whether this is the case. Finally, prices are at least partially correlated.

The authority of the EU energy regulators (Acer) is now to develop an LNG price index that complements the TTF. The new index would be based on real-time information on the LNG transactions completed on a daily basis, thereby increasing transparency in the market. And Russian President Vladimir Putin would be less able to manipulate this index because he no longer depends on (Russian) natural gas deliveries through pipelines, hopes in Brussels.

In order for this index to be effective, however, it would have to be accepted by the market. This is by no means certain. After all, anyone can come up with a price index if they want to.

Forced Solidarity

Another sensational measure is the continuation of forced solidarity. The Commission led by German President Ursula von der Leyen already introduced this somewhat strange concept when introducing gas-saving measures, which help Germany in particular. It is now to be extended to natural gas deliveries in emergency situations.

So far, the rule has been that states should negotiate bilateral solidarity agreements with each other. These record who gives whom how much gas at what price should an extreme crisis occur. So far, however, there are only six such contracts. Germany has one treaty with Denmark and one with Austria. There are also arrangements between Estonia and Latvia, Lithuania and Latvia, Italy and Slovenia and Finland and Estonia.

So far, Switzerland has not succeeded in concluding such a solidarity agreement with Germany.

The Commission is now proposing that a standard contract should be used in the crisis if no bilateral agreements exist. Brussels wants to create incentives for even more bilateral agreements to be signed. Germany is interested in an agreement with Italy, among others, but has not yet reached an agreement. The question now is whether the Commission’s proposal will bring new dynamics to these talks and what the consequences might be for Switzerland. The corresponding pipelines ultimately lead through the territory of the Swiss Confederation.

The Commission also wants to tighten the screw on the joint purchase of natural gas. Although this possibility already exists, it was voluntary. Now the EU countries are to acquire a quantity of 15% of all natural gas storage volumes, i.e. around 13.5 billion cubic meters, in the EU. This is to prevent countries from outbidding each other and driving up prices. And with the bundled purchasing power, more advantageous conditions, i.e. lower prices, would be achieved, especially for smaller countries.

Specifically, a service provider is to be determined who would collect the demand from the various companies in the EU countries. This company would then solicit bids for the corresponding amount of natural gas in the market.

If the participating companies then decide on a corresponding offer, they can then also form a gas purchasing consortium for the purchase, which will agree on volumes, prices, delivery locations and so on, writes the commission. Ultimately, however, this corresponds to a cartel and is therefore tricky from the point of view of competition law.

This purchasing platform should be ready by spring 2023, when it will be necessary to replenish the natural gas storage facilities in the EU.

Softened requirements are intended to prevent liquidity bottlenecks

In order to alleviate energy companies’ liquidity problems, the Commission is also proposing that companies should in future be able to bring in additional assets as collateral, rather than just cash as is currently the case. For example, government guarantees should also be able to act as security.

In addition, the limit for depositing such collateral is to be increased from EUR 3 billion to EUR 4 billion. Those who act below this limit should not be subject to any regulations in this regard.

And finally, the Commission would like to make available 40 billion euros from the last EU seven-year budget (2014-2021), which have not yet been used, to help households and companies that are particularly hard hit by high energy prices.

Next, the 27 EU heads of state and government will discuss these proposals from the EU Commission at their autumn summit on Thursday and Friday in Brussels. If they give the green light, von der Leyen’s committee would present concrete draft legislation.