EU leaders give political backing to gas price cap — but details yet to be hammered out

BRUSSELS — The European Union on Friday moved one step closer to establishing a cap on gas prices after several months of discussions, with Germany now conceding that the idea “makes sense.”

The EU has been battling against an unprecedented energy shock stemming from Russia’s invasion of Ukraine. However, action thus far to curb gas prices has come mostly from national governments rather than at the EU-wide level.

One of the biggest stumbling blocks had been over whether to impose a cap on gas prices, with Germany and a few others wary of potential market repercussions from this policy.

German Chancellor Olaf Scholz said in Berlin on Thursday that this “always harbors the risk that the producers will then sell their gas elsewhere.”

However, after negotiations with his European counterparts that dragged into the early hours of Friday morning, Scholz agreed to go ahead with the measure — albeit with caveats such as the need to design it in a way that it does not drive-up consumption.

Belgian Prime Minister Alexander de Croo told CNBC on Friday that Germany had “legitimate concerns.”

De Croo said that the heads of state listened to one another and looked to bridge all their differences. “This is a big step forward,” he added.

Before their gathering started, expectations to see the 27 leaders coming together on a price cap were very low.

The prime minister of Luxembourg, Xavier Bettel, noted that there were “a lot of taboos,” but that these were resolved during the summit.

“We didn’t decide everything, but we gave homework [to their energy ministers] and we were able to agree on the list of things to do which is … a big step,” he told CNBC.

The political support from all 27 heads of state means that, in the coming weeks, European energy ministers and the European Commission ꟷ the executive arm of the EU ꟷ will be working on the technicalities of how a “temporary dynamic price corridor” is going to work.

This is expected to establish a flexible range for gas prices, but more precise details are expected in the next two to three weeks.

After that, Belgium’s de Croo said that the implementation could be “quite fast.”

Regardless of the details, the cap is only a temporary policy that is not expected to be in place once a second benchmark is established.

At the moment, European natural gas prices are reflected via the Dutch Title Transfer Facility. But EU leaders have agreed that this benchmark no longer reflects the reality that most of them are receiving liquefied natural gas rather than pipeline gas, and so they plan to have a second benchmark in place by the end of the first quarter of 2023.

European gas prices have spiked in the wake of tensions with Russia, which used to be Europe’s main seller of natural gas.

At their peak, prices climbed above 340 euros ($332.6) per megawatt hour in late August. The contract traded at about 30 euros per megawatt hour in August 2021.

Markets seemed to have welcomed the outcome of the EU leaders’ meeting with prices falling from about 127 euros per megawatt hour on Thursday to 110 euros per megawatt hour in afternoon trade on Friday.