EU Commission proposal for joint gas purchasing, price caps and collective allocation of gas: an assessment

The European gas crisis has led to pressure from several EU Member States to put in place wholesale price caps. In October and November 2022, the EU Commission proposed a series of measures including: a wholesale gas price cap; joint purchasing of gas; calculation of a European LNG price benchmark by the European energy regulator, ACER; and default rules for the collective allocation of gas between Member States in the event of an emergency. The paper assesses the various proposals and likely impact on European gas markets.

The price cap proposals are set to cap the TTF front month price (M+1) at €275/MWh so long as there is a differential between the TTF spot price and European LNG prices of at least €58/MWh, and if the TTF price were to be above that level for the preceding 10 days. Wholesale price caps will make it more difficult to balance supply and demand until more LNG supply becomes available; will likely benefit richer households more than poor ones; will benefit energy inefficient companies more than efficient ones; may reduce competition within wholesale gas markets making it likely prices will remain higher for longer; and could jeopardise security of supply if less gas flows to the EU, or by harming intra-EU gas flows. Wholesale price caps also increase the likelihood of, and need for, administrative allocation of gas, that is, rationing.

The time spent on discussing gas price caps has a real opportunity cost for European energy markets. The proposals do nothing to solve the fundamental problem underlying price increases. Time would be better spent on measures which reduce gas demand or supporting those who suffer most from high gas prices. These include targeted subsidies to vulnerable households and specific industrial sectors, or investments in energy efficiency, energy storage and alternative energy sources.

By: Alex Barnes