European energy crisis: leaders grapple with tough choices

Countries have so far struggled to agree on how to limit gas prices this winter

Olaf Scholz, Chancellor of Germany, where many fear cheaper gas prices will increase consumption. EPA

The EU‘s 27 state leaders are meeting on Thursday and Friday in Brussels as the continent is gripped by a severe energy crisis. Talks are expected to be tough. The bloc has so far failed to agree on how to lower gas prices that have soared since Russia invaded Ukraine in February.

Many leaders are worried about blackouts and social unrest over the winter. The EU has scrambled to lower its dependency on Russian pipeline gas — Germany managed a 31 per cent reduction last week — but the process of building reserves has been chaotic. Countries outbidding each other for gas supplies has spurred Brussels to come up with a bloc-wide solution.

European energy ministers, diplomats and officials have been negotiating intensely behind closed doors for weeks to finalise proposals for heads of state to examine in the coming days.

Why the urgency?

Companies might close or relocate outside the EU. “Our global competitivity is at stake,” an EU diplomat told reporters on Wednesday. “In the US, the price of gas is much lower — the same gas they sell us at four times the price,” he said. “We must act fast.”

So far, the percentage of Russian pipeline and liquefied natural gas (LNG) has decreased from 45 per cent of the EU’s imports prewar to 14 per cent as of last month, a commission spokesman told The National. In parallel, EU countries have brought down their gas demand by 15 per cent.

But more is needed, and many, including Italy, are calling for a swift capping of prices.

European leaders are also trying to figure out how, without Russian supply, they will start filling their gas tanks next March so that they are full again by the winter of 2023.

Tension that burst into the open this week between two of the EU’s most important economies, France and Germany, are expected to further complicate negotiations.

Gas price caps

At least 15 countries are calling for capping gas prices in a similar fashion to what has come to be known as the “Iberian model”. In March, Spain and Portugal secured special treatment and introduced a subsidy for fossil generators with a tax on electricity.

This has significantly lowered electricity prices in the two countries, benefiting consumers. At the time, the European Commission’s President Ursula Von Der Leyen said this mechanism had been possible to implement in Spain and Portugal because of their limited interconnections with other European electricity grids and their high proportion of renewable energy.

But extending the Iberian model to the rest of Europe comes with potential complications.

Countries like Germany worry that lower prices will increase gas consumption and also Europe’s needs and vulnerability on global markets.

Also, some fear that cheap subsidised electricity might “leak” to non-EU countries such as Switzerland and the UK.

What are electricity 'leaks'?

A senior EU official on Thursday told reporters that leaks were a “question of concern”.

“The more interconnection you have, the more [risk that] you might export cheap electricity,” he said.

The diplomat said “very technical solutions” were available to potential leakage.

“If we put in place a form of floodgate to stop leakages, then there is a risk for the stability of the electricity network” he said.

The solution, he explained, is a system that experts call “double bidding”, meaning the first bidding allocates electricity, and the second decides on the price.

“Everything is going very fast. The Iberian model has not been in place long and the possibility of extending it to the rest of Europe has only been discussed for the past weeks,” said the diplomat.

“There’ll be a lot of work in the next 48 hours to make sure everyone is reassured and feels ready to give the commission the mandate to work on this."

Are there risks of driving up gas consumption?

Because Spain’s gas consumption increased when it started implementing the Iberian model, some think that this would automatically apply to the rest of the continent should it follow suit.

But that is not the case, according to the European diplomat. “The European commission has solid data that shows that there is no risk of an increase in gas consumption at the European level,” he said.

He said that Spain experienced water stresses this summer that slowed down its generation of hydroelectric power. The Iberian model worked "so well" that Spain also exported electricity to the South of France, which encouraged it to produce more electricity, he added.

Can the EU intervene on the markets?

Yes. The EU Commission laid out its propositions to intervene on energy markets on Tuesday and they will be discussed by EU leaders in the next two days.

The commission proposed a correction mechanism which aims at limiting excessive fluctuations of prices. In the longer term, it wants to replace the Dutch TTF index with an alternative that would be more adequate for Europe as it transitions from being reliant more on pipeline to LNG gas.

“Some countries are very attached to this option and would like to go further,” said the diplomat.

The commission has called on the Agency for the Co-operation of Energy Regulators to immediately prepare a price assessment tool to collect real-time information on all daily LNG transactions and establish a new benchmark by the end of March.

Such technical questions will not be solved this week but rather in upcoming meetings between European energy ministers, said the EU official.

There are questions of legality such as the issue of changing a benchmark that is a reference point in many energy contracts.

Another option proposed by the commission has been joint purchasing which would be mandatory for at least 15 per cent of the volumes needed to fill European gas storage tanks.