European ceiling on the price of natural gas: The way, the benefits, the risks

As electricity prices continue to rise within European borders making life increasingly difficult for households and businesses, the question comes back emphatically: Should the EU put a ceiling on natural gas prices?

Energy prices in the EU have soared since Russia invaded Ukraine last February. As a matter of fact, in the past few days the cost of electricity in the EU has been ten times higher than the average of the last decade. And that, mainly because of her increase in natural gas prices.

As consumers shoulder ever greater financial burdens, EU leaders are being called on to act to tame exorbitant energy costs. How could they achieve this? “One way is to put a cap on natural gas prices for electricity,” the website Gzero notes in its analysis.

Short-term political gamble

But how could such a thing be done? A proposal, put forward by the outgoing Italian Prime Minister Mario Draghiis to put a cap on the price of Russian gas bought by EU energy companies.

Such a move would limit Moscow’s bargaining power vis-à-vis the EU. At the same time, however, it would also risk the possibility of seeing Russian “retaliation” such as, for example, the complete interruption of Russian gas flows to the EU by Moscow (examples of which we have already seen through the successive – possibly feigned – interruptions in Russian flows through the Nord Stream 1).

The EU’s energy mix

Another – more popular but also more populist according to Gzero – option is to put a cap on the price of natural gas used to produce electricity regardless of country of origin. In such a case, EU governments would pay the energy companies the difference between this cap and the higher gas price, so that the companies would not have to pass the cost on to consumers.

Eurasia Group’s Raad Alkadiri treats this negotiated ceiling as short-term political gamble which can give EU leaders a breath so that they can diversify away from Russian natural gas without risking a major backlash from European consumers struggling to pay their electricity bills.

Brussels, Alkadiri adds, apparently wants to reduce dependence on Russian gas, but EU member states need more time to import and store enough liquefied natural gas LNG from other sources such as Algeria or Qatar, while the greatest possible inclusion of them renewable energy sources the energy mix takes time.

A cap on the price of natural gas aimed at consumers has already been in place since June in Spain and Portugal, which have been given the go-ahead by Brussels to pilot this system. However, as Gzero notes in its analysis, the Iberian Peninsula does not buy large quantities of Russian gas and is to some extent disconnected from the wider EU wholesale market.

Unwanted consequences

The extension of this Iberian system to the entire EU could, however, also have some undesirable consequences, Gzero analysts warn.

Artificially “cheap” gas could encourage Europeans to consume more just a month after EU member states agreed to “voluntarily” cut consumption by 15% by April 2023. In such a case, higher demand would it pushed prices up thus, over time, making the subsidy unsustainable for governments.

Furthermore, countries like Italy and Spain are already over-indebted, opper means, and would go even deeper into debt if they borrowed more money to protect their citizens from exorbitant electricity bills while the war in Ukraine continues.

As a matter of fact, there are voices that argue that this whole debate is actually undermining the EU’s plans for climate neutrality by 2050.

Opponents of the plans argue that they subsidize not only consumers but also fossil fuels, and that public funds would therefore be better spent accelerating the transition to renewables.

The cost of weaning off Russian gas is too high, according to Eurasia Group’s Raad Alkadiri. However, even governments that present themselves as fiscally responsible, the last thing they want is to be faced with angry voters who have been made poorer by energy bills…

Source: Gzero, Eurasia Group

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The article is in Greek

Tags: European ceiling price natural gas benefits risks

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