Calculation of the EU when proposing to impose a ceiling on Russian gas prices

The proposal to impose a ceiling on Russian gas prices was put forward by the EU as a way to curb Moscow's revenue while also controlling regional energy prices.

The President of the European Commission (EC) Ursula von der Leyen announced on September 7 a proposal to impose a ceiling on Russian gas prices , along with a series of other measures, to respond to the energy crisis that the European Union is facing. (EU) is facing.

Electricity and fuel prices in the EU have skyrocketed since Russia launched a military campaign in Ukraine at the end of February. Sanctions and retaliation between the West and Russia have caused the flow of gas Moscow supplies to Russia. Europe is significantly reduced.

Russian energy group Gazprom said on September 7 that the flow of Russian gas to EU countries has decreased by 48% since the beginning of the year, if the UK is included, it is down by 49%.

The EU accuses Russia of using gas as a weapon in retaliation for Western sanctions. Moscow has repeatedly denied, saying that sanctions from the West and technical problems on the Nord Stream 1 pipeline hinder the flow of gas to Europe.

Russia has indefinitely closed the Nord Stream 1 gas pipeline to Germany because of the main turbine at the Portovaya compressor station, near St. Petersburg, had an oil leak, restarted only when the problem was fixed. Gas flow through Nord Stream 1, which transports about 55 billion cubic meters of gas per year, has only reached 20% of capacity since July.

EU energy ministers will meet on September 9 to discuss urgent measures to help reduce the energy price burden on businesses and households. Governments in many countries such as Germany and Greece are "burning" billions of euros a month to subsidize electricity prices, which have increased fivefold from last year in some places.

European Commission President Ursula von der Leyen speaks at a conference on the energy crisis in Brussels, Belgium, September 7. Photo: AP .

In a document obtained by the Financial Times on September 5, the EC recommended that member states implement an "emergency wholesale price ceiling" on gas supplies and presented two options. One is to set a payment limit for gas imported from Russia. The second is the implementation of a price ceiling system that varies from country to country, depending on how dependent they are on Russian gas.

According to the EU, the first goal of the proposal to impose a ceiling on Russian gas is to limit Moscow's export revenue. The ceiling price can be agreed by the whole EU or a Russian gas buyer negotiates a specific level.

However, Brussels noted that this proposal risks triggering "force majeure" clauses in the Gazprom contract and "may escalate geopolitical tensions" between Russia and Europe.

Force majeure is a clause included in contracts to remove liability for unavoidable situations. Gazprom used this excuse in July when it stopped supplying gas to Europe.

Another measure is to divide EU member states into "green zones" and "red zones" according to their sensitivity to gas supply disruptions. Russian gas prices may be hit a ceiling in the red zone, but remain high enough in the green zone so they can buy gas and then transfer it to the red zone.

A facility on the Nord Stream 1 pipeline system in Lubmin, Germany, June 21. Photo: Reuters .

By imposing a ceiling on gas prices, the EU can achieve another goal of reducing electricity prices. Managing electricity prices is not only an economic and social goal, but also a political imperative in Europe. France has witnessed a series of protests of the "yellow vest" movement that broke out at the end of 2018 due to rising energy prices.

Wholesale electricity contract prices for 2023 in Germany hit a record high of 1,050 euros/MWh at the end of August, 14 times higher than in the same period a year ago, before falling.

Under the EU energy system, wholesale electricity prices are set by the price from the final power plant to meet aggregate demand.

All power generators, from fossil fuels, wind or solar, bid to participate in the market, setting prices according to their production costs. Prices will go from the cheapest to the most expensive, gas-generated electricity. Electricity prices are usually set according to gas prices.

Under this system, since all electricity is sold at the same price, parties producing with low-cost renewable energy will have larger profit margins, encouraging them to invest more, thereby helping Europe climate goals soon.

However, some countries such as Spain argue that the system is flawed because cheap renewable energy is sold to consumers for as expensive as fossil fuel electricity.

"Yellow vest" protesters in Caen, Normandy, northern France, in November 2018. Photo: AFP .

The idea of ​​imposing a ceiling on gas or electricity has long been supported by Spain, Belgium and other countries. Germany and Austria didn't want to do it at first, but now they're starting to change their minds. France is among the supporters of separating gas prices from electricity prices.

However, high gas prices also have certain plus points, because European households and businesses will tend to reduce consumption to save, a behavior that is being encouraged by EU governments to ensure safety. the area has enough energy to get through the coming winter.

The imposition of a gas ceiling price will reduce this saving incentive, observers fear. Critics say this is even counterproductive, causing people and businesses to increase gas consumption.

Some analysts suggest a better option is to financially support the hardest-hit low-income households and businesses, rather than hastily reshuffle the market.

It is not clear how the EU will implement the measures to impose a ceiling on Russian gas prices, but Moscow is likely to respond firmly.

At the Eastern Economic Forum in Vladivostok on September 7, Russian President Vladimir Putin described Europe's plan to impose a gas ceiling price as "another silly idea" and "a non-market solution". no prospects".

"If European countries want to give up their competitive advantage, that's up to them," he added. "We will not provide anything that is against our interests, in this case economic interests. Air, no oil, no coal, no fuel, nothing."