The EU is looking for a suitable gas price cap

While politicians were only disturbed by the sound of trumpets when they arrived at the EU summit in Versailles, France, on Friday some demonstrators shouted their demands at the participants in front of the imposing Prague Castle. However, most heads of state and government ignored them and spoke impassively into the microphones.

Anders Gitanas Nauseda: The President of Lithuania got out of his black limousine and instead of running to the red carpet, he quickly walked towards the protesters. The people waving Ukrainian flags, EU flags and the emblem of the pro-European party Volt were so amazed that their calls for a strong EU and the abolition of unanimity were silenced. Nauseda responded to calls for more aid to Ukraine, pledging his support. “We will win,” said Nauseda and then made his way towards the red carpet.

fear of riots

While on Thursday, the first meeting of the European Political Community (EPG) in the Czech capital, the solidarity of the democratic states of Europe against Russia was still in the foreground, the talks on Friday revolved around energy issues. And this time, unlike on Thursday, the differences could not be glossed over.

The high energy prices and the associated increase in inflation to levels not seen before in the euro era are causing fears among politicians. They fear that there will be social unrest in their countries and that industrial companies will shift their activities abroad. The fact that both gas and electricity prices have recently fallen on the markets does not change this, albeit at a high level.

All heads of state and government want to do more to combat the high prices. In advance, it had been agreed to tax certain energy producers more heavily and to collect a solidarity levy from oil companies. With this money, the EU countries can subsidize the electricity and gas bills of the poorest citizens. Furthermore, the countries want to reduce consumption not only of gas but also of electricity.

The design of a possible upper price limit, a cap, for natural gas remained open. This was the focus of the participants at the Prague meeting on Friday: Fifteen countries want a price cap on all natural gas imports. That would mean that the EU would no longer pay allied countries like the US and Norway the market price for their liquefied (LNG) and pipeline gas. This measure does not make sense from an economic point of view. After all, the high price is a signal of scarcity, and thanks in particular to its purchasing power, Europe has bought the world market empty and filled its storage facilities in recent weeks.

The Commission initially resisted such a price cap. On the contrary, they wanted an upper limit only for Russian natural gas, as was already the case with oil. That would stem the flow into Moscow’s war chest. In addition, Russia can bring its gas to other customers a little less easily than the USA, for example, can bring its LNG ships. However, not much natural gas is coming from Russia anymore, and the Kremlin could turn off the tap completely.

However, Brussels has softened and is considering implementing the so-called Iberian model in the EU. Spain and Portugal have subsidized the price of natural gas that is delivered to power plants and converted into electricity. This lowers the price of electricity. However, this model also has significant disadvantages. Firstly, it is very expensive as the state has to shell out the difference between the market price and the price cap. The electricity price then falls (if the producers pass on the cost advantage). But this also reduces the incentive to save electricity and there is a risk that consumers will demand even more electricity.

And thirdly, as the case of Spain has shown, there is a risk that other countries will also take advantage of artificially cheap natural gas and electricity. The problem would be exacerbated in the case of Germany, for example, which has more cross-border energy links than Spain.

There are also many other ideas and models. Germany, for example, would like to put a price cap on basic consumption of electricity and gas. Anyone who consumes more must pay the higher market price or the contractually agreed price. The incentive to save is therefore maintained, even if only on the “luxury amount”.

Anger about the German double boom

The German “double boom” also provided a topic of conversation. It has not gone down well in many EU capitals. Rome, Paris and Brussels felt left out. As a result, there were pointed comments and public criticism from EU Commissioners Thierry Breton (France) and Paolo Gentiloni (Italy).

If German companies only got through the crisis better because Berlin could take on more debt and support them more extensively, that would distort the internal market, they said. That is why the commissioners insisted on a “European solution”, which is usually a kind of code word for common debts, to which Germany, as the largest EU economy, has to contribute a lot.

It was discussed in Prague. German Chancellor Olaf Scholz presented the measures to his counterparts and cleared up misunderstandings, as he said after the meeting. Others would also provide help, and the German defense shield was appropriate for the size of the country.

For his part, French President Emmanuel Macron had previously not shown himself to be very impressed by the pipeline between Spain and France that Germany wanted to bring natural gas from the LNG terminals on the Iberian Peninsula to Germany.

Even with the already agreed natural gas savings, the other EU countries had made a name for themselves more with exceptions than with savings zeal. So one can hardly blame Germany for thinking that it was just helping itself. Scholz said that only a fifth of the recovery fund accumulated for corona damage had been paid out and that 600 billion euros were still available.

Commission President Ursula von der Leyen spoke of additional funding for the Repower EU program, which actually wants to promote investments in renewable energies. But now money from the development fund could also be used to combat energy prices via this vessel. Von der Leyen now wants to work out further proposals. The energy ministers are already meeting next week, and later in October the regular autumn summit of the EU in Brussels is scheduled.