EU Weighs Gas Price Caps and Benchmarks to Combat Russian Squeeze

Article content

(Bloomberg) — The European Union is weighing new gas benchmarks and price caps as Moscow’s tightening supply squeeze forces the 27-nation bloc to assess drastic measures to curb spiking energy costs.

Article content

EU leaders are coming under increasing pressure to address soaring prices before winter after Gazprom PJSC decided not to turn the crucial Nord Stream pipeline back on after maintenance. Ministers are due to debate on Friday the form of a planned emergency intervention in the energy market.

Article content

As part of preparations for the gathering, the European Commission is also assessing options to subject the Dutch Title Transfer Facility — the virtual gas marketplace whose main index is used for long-term contracts in Europe — to financial supervision to avoid speculation, according to internal EU documents seen by Bloomberg News on Monday.

“The price premium between the TTF and Europe’s LNG delivered ex-ship indices has widened significantly bringing up questions about its representativeness as an index for linking the contracts in the whole EU-27,” the commission said in the document.

Article content

The options could include setting up an additional complementary benchmark to ensure a better functioning market with less volatility, according to the EU’s executive arm. Another possibility is setting up a European trading platform for LNG.

As a last resort in case of supply disruption in Europe, the EU could also explore temporarily pegging the TTF to the JKM Asian benchmark as a dynamic cap. Yet that would require the use of other hubs or mechanisms to allocate gas inside Europe, the commission said in the document on benchmarks for the wholesale gas market.

“In this situation, JKM would become the world price for international gas for some time,” the commission said. “The wholesale market would be therefore determined by LNG supply/demand, and not by the EU’s internal bottlenecks. LNG would still be attracted by the fact transport costs are lower to the EU.”

Article content

Gas Prices

In a note on Russian gas imports, the EU outlines two potential instruments: a price cap on imported gas and administrative pricing during emergencies for regions hardest hit by supply disruptions. Those proposals will be discussed with experts from member states at a technical meeting on Sept .7.

EU Commission President Ursula von der Leyen said last week that she was convinced there should be a price cap on Russian gas. However, diplomats say member states remain divided over such a move, fearing it would lead to a complete halt in Russian flows.

In the document, the commission stressed that while Russia has already sharply reduced shipments to the EU, this option should only be considered if the bloc is ready to accept a full disruption.

“The price cap should be designed in a way that Russia finds itself worse off under a gas delivery stop than complying with the price cap,” the commission said in the document. “Given that in the previous decade (2010/2020), prices of Russian gas have settled between 5 euros and 35 euros/MWh, any cap above that level would ensure that Russia would be above its marginal production costs.”