‘Never ending ping pong’ delays EU deal on how to cut energy costs

With European countries bracing for a tough winter and governments nervous about a public backlash to high energy costs, national leaders have gathered in Brussels to discuss whether they can intervene in the markets to bring prices down.

The European Union already agreed to impose a levy on energy companies to funnel high revenues back to support consumers and businesses, but a group of countries has been urging for an intervention to stop prices from spiking in the first place.

Italy, Spain, Belgium and Greece have led calls for a “cap” on the price of gas, a principle that has been backed by some 15 member states in an urgent joint appeal for an intervention that can staunch the damage that national interventions to help consumers are doing to their balance sheets.

But looking closer, different countries mean different things by the term “gas cap”, and there is no consensus on what exact action to take, not least because of the scepticism towards the idea in countries including Germany and Ireland.

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Iberian model

Countries such as France are interested in the idea of extending a system known as the “Iberian model” to the rest of the EU.

This was put place in Portugal and Spain after Spanish prime minister Pedro Sánchez refused to leave a previous summit of EU leaders in March without an agreement on an “Iberian exception” that would allow the peninsula to cap gas.

When gas power plants kick in to meet surges in electricity demand, gas sets the price of all electricity in the market under the marginal pricing system — even renewables, which produce most of Spain’s electricity.

The Iberian model limits the price that can be paid for gas that is used to generate electricity to about €50 per megawatt hour. Gas energy producers that still have to buy the gas at higher prices internationally are subsidised for the difference through a levy on non-gas producers — which are still earning premium for their energy even at the €50 level.

The system has brought costs for consumers down, though not by as much as hoped, and critics point to downsides. They say it perversely incentivises the consumption of gas at a time when it’s vital to cut usage, and that Spain has ended up subsidising French consumers because the interconnected energy systems mean that cheaper Spanish electricity is “leaking” over the border.

Critics fear that if put in place across the EU, the cheaper energy would similarly end up leaking away to be used by consumers and businesses in Switzerland and Britain, which are connected to the EU electricity grid.

Irish position

For Ireland, the overriding concern regarding energy is security of supply, which outweighs even concerns about energy costs. Because Ireland has no storage capacity for gas and relies on international imports for most of its supply, it depends entirely on a functioning international market to avoid blackouts.

For this reason, the Government is highly sceptical of any intervention that might accidentally discourage international gas suppliers from selling to the EU. This goes for proposals for gas “corridors” or “dynamic price caps”, which involve fixing an EU cap for gas that moves up and down but is always a set amount higher than an alternative international measure, such as the Asian liquified natural gas (LNG) benchmark.

This is intended to ensure that gas sellers always have the incentive to supply the EU. But officials fear it could still endanger supply because the actual prices being paid for gas are neither transparent nor fully reflected in such benchmarks, because much dealing is concealed within private purchase contracts.

With EU national leaders deeply divided between enthusiasts and critics of gas caps, the European Council has repeatedly passed the buck to the commission, asking its technical experts to produce new proposals for gas caps for their consideration.

Energy interventions

Earlier this week, the commission produced its latest round of proposals for energy interventions.

The package included the idea of jointly purchasing gas to prevent EU countries from bidding up the price by competing against each other, and two kinds of mini “gas caps” — one temporarily limiting prices on the Dutch TTF gas benchmark in emergency situations and another limiting intraday volatility.

To the frustration of some member states, the commission has refrained from formally proposing the EU-wide adoption of the Iberian model — many of its experts remain sceptical — but has fudged the issue by suggesting the system is worth further consideration.

Its proposals for joint purchase and storage, the development of a new benchmark that reflects the EU’s increased use of LNG better than the pipeline gas-dominated TTF, expedited permits for renewables, and tweaks to liquidity rules to help energy companies, are all said to have “landed well” with member states and are headed towards consensus.

But on the issue of gas caps, the 27 remain divided. For some, the commission’s mini-gas cap proposals go too far, and for others they are not nearly enough.

Ireland is likely to insist that it can’t agree to anything without a formal proposal laying out precisely what it involves and an impact assessment of its potential effects.

Gas-cap sceptics are unlikely to be won around in this summit and neither will gas-cap champions abandon the idea.

It all means the member states are set to once again pass the buck back to the commission to draw up fresh proposals that could win consensus among the 27 — while prospects for intervention in time for this winter fade.

“This is a never-ending ping pong that we have,” one official said.