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The Green Brief: Why Brussels hates price caps on fossil fuels

For many, the protracted debate on whether to place a cap on gas prices in the European Union should have been settled already months ago.

After all, Spain and Portugal have already implemented a price cap on gas used for electricity generation since April, with the blessing of Brussels – albeit reluctantly.

The debate looked settled last month when European Commission President Ursula von der Leyen threw her weight behind a price cap on gas as a “temporary solution” to the energy crisis until the EU executive develops a new price index that better reflects the growing importance of liquified gas on the EU market.

But last week, the Commission made a surprise U-turn.

After supporting the idea of a “dynamic” price ceiling, and suggesting it was ready to support the extension of the Iberian mechanism to the rest of Europe, the EU executive appeared to be dragging its feet once more.

In a “non-paper” circulated to EU capitals on the eve of an extraordinary Energy Council meeting last week, the Commission contradicted all its recent political declarations.

A price cap on gas used for electricity, it argued, risks pushing gas demand even further and worsening “the already difficult situation as regards gas security of supply”.

Artificially low prices would also risk increasing flows of subsidised electricity to non-EU countries and push up gas consumption even further, by 5 to 9 billion cubic meters (bcm), the paper warned.

Moreover, the benefit of an EU-wide price cap would not be distributed evenly among EU member states, the paper argued, with France expected to be the biggest net beneficiary, while the Nordics, the Baltic states, and Eastern EU countries were expected to lose out.

The result of the Commission’s move was to sow confusion and, ultimately, delay any decision.

That may have been the intention. The timing of the paper’s publication, on the eve of the Energy Council, raised eyebrows among the 27 national delegations. Confused diplomats even turned to EURACTIV to ask what was our reading of it.

Most annoyed among them was Czech Energy Minister Jozef Sikela, who was chairing the meeting and criticised the EU executive for its handling of the file, saying “it is clear that the Commission and maybe a few member states do not see an Iberian model as a way forward”.

With gas prices receding on the back of full storages and a warm autumn, Brussels now seems to be playing for time, saying it could make a proposal for a gas price cap “this winter already if we get the mandate” from the 27 EU member states.

Given the elusive consensus among EU countries, this seems rather like kicking the ball into the long grass. Germany and the Netherlands, in particular, are opposed to any kind of price cap, warning it would limit the ability of companies to buy gas on the market.

Brussels is undoubtedly receptive to those warnings. For almost two decades now, it has been trying to build a European energy market and putting up new barriers – like a price cap – risks undoing those years of patient work.

But there is probably also a more fundamental reason behind the Commission’s reluctance to intervene in the energy market: Brussels sees the current crisis also as a massive opportunity to push forward its European Green Deal.

Since 2005, the Commission has worked tirelessly to establish an EU-wide carbon market that puts a “price signal” on polluting fossil fuels. And with the ongoing energy crisis, the price signal is working like never before, pushing the European Union to consider unprecedented plans to bolster energy efficiency and drive renewable energies forward.

Across Europe, gas consumption has already fallen 7% compared to the 2019-2021 average, according to Bruegel, a think-tank. Across the EU, people are looking for ways to reduce their energy consumption by insulating their homes or ditching their gas boilers to buy a heat pump.

“You know, my mom talks about this. Her friends talk about it. On everyone’s mind is: ‘how can I save energy?’,” the EU’s climate chief Frans Timmermans said at a recent event on energy efficiency.

And the reason they’re doing that is not because they want to save the climate, he pointed out. “The main reason is that they can’t afford to pay their energy bills anymore.”

Of course, EU member states will need all the support they can get to address the social consequences of the crisis, Timmermans continued.

“But let’s make sure we address it in a way that is consistent with our long-term goals in terms of our energy transition,” he insisted.

In other words, don’t kill the price signal now that it’s finally delivering.

“The era of cheap fossil fuel is over. For good. It will not come back,” Timmermans stressed.

Source: Euractiv