LEAK: EU countries urged to prepare for Russian gas ‘supply shock’

Following the decision to cut by 40% the volume of gas supplies to Germany along the Nord Stream pipeline on 14 June, the Russian energy giant announced what appears to be another retaliation against EU sanctions- a 15% reduction in gas supplies to Italy.  [Mindscape studio / Shutterstock]

In a policy document due to be adopted on Wednesday (18 May), the European Commission urges EU member states to step up preparations for a “full disruption of Russian gas supplies” by considering emergency measures like a temporary cap on gas prices.

After Russia cut off gas supplies to Poland and Bulgaria in April, the Commission is asking EU member states to prepare for a full scale “supply shock”.

Natural gas has been trading at around €100/MWh since mid-March, a seven-fold increase compared to long-time average prices, with occasional peaks at €200/MWh, caused mainly by a shortage of supplies from Russia. This has led to an increase in electricity prices, largely determined by backup power generation from gas-fired powered plants.

And while previous measures adopted in the Autumn were calibrated to address a situation of sustained high gas prices, “a different set of measures may become worth considering in the event of a sudden large scale or even full disruption of the supplies of Russian gas leading to unbearably high gas prices and inadequate supply of gas,” the EU executive says in the draft policy document.

EU outlines short and long-term answer to global energy price surge

The European Commission unveiled on Wednesday (13 October) a “toolbox” of measures  EU countries will be able to draw from when responding to rising energy prices in the short term, while pointing to an upcoming gas market reform for measures to be considered in the long term.

First among the new measures envisaged in Brussels is a direct market intervention with “a maximum regulated price for natural gas delivered to European consumers and companies (EU price cap),” says the draft obtained by EURACTIV.

Although capping gas prices would immediately relieve consumers and thwart inflationary pressures on the economy, it is highly controversial, even inside the European Commission.

“One major negative effect is that we lose the price as an important information for gas demand in times of crisis,” wrote an unidentified EU official in the proposal’s text, which was submitted internally for revision among Commission departments. “Another very important negative effect is that the announcement of a gas price cap in times of emergency leads to lower storage injection today, which must be avoided by any means,” the official added.

Those concerns are widely shared among the Greens in the European Parliament.

“Capping the price of gas is not a solution,” said Michael Bloss, a German Green MEP. Instead of throwing billions of taxpayers’ money at Russia and other gas suppliers, “we need to use this money for the energy and heat transition”, such as solar rooftop and heat pumps, he told EURACTIV. “That will lower prices massively.”

“We need a buyers’ cartel. The price of gas will fall if G7 only buys gas for a low price. For this, we need courage and creativity and must not simply surrender to the absurdly high gas prices,” Bloss added.

Academics have also warned against capping prices, saying it will deplete storage and discourage firms from filling up.

“In gas markets, short-term spot prices are linked to long-term future prices through gas storages,” said Lion Hirth, an assistant professor for energy policy at Hertie School in Berlin. “If governments announce a future price cap, firms have no incentive to fill gas storages, but quite the opposite: it would suddenly be financially attractive to postpone storage injections or even deplete storages today and sell gas as long as prices are high,” he told EURACTIV in written comments.

“Lower storage levels are not in the European interest,” Hirth continued, underlining that the urgent priority is to fill up storage ahead of next winter.

This may also be contradictory with regulations currently being considered by the EU to require minimum gas storage levels every year ahead of the winter heating season.

“To the extent that such requirements force storage operators to fill them up regardless of financial incentives, current spot prices will fail to decline despite low future price expectations,” warned Hirth, who co-authored the comments with Ingmar Schlecht, a scientific associate at ZHAW Center for Energy and Environment.

> Read the draft EU communication below or download here.

Communication energy markets

[Edited by Alice Taylor]

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