# Explainer-Caps and corridors: how can Europe contain gas prices? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-10-07 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: How Europe could cap gas prices: Options and Obstacles Meta Description: Get insights into the EU leaders' discussion on capping gas prices to combat inflation pressures and maintain energy security in Europe. URL: https://financedigest.com/explainer-caps-and-corridors-how-can-europe-contain-gas-priceshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-10-07t040330z1lynxmpei9605lrtroptp4ukraine-crisis-eu-gas-1736815083165-compressed.jpg) By Kate Abnett BRUSSELS (Reuters) – Leaders of European Union countries will debate whether and how to cap gas prices on Friday, after member states increased the pressure on Brussels to limit fuel costs. European Commission President Ursula von der Leyen on Wednesday suggested gas price cap options for the EU leaders to discuss, after France, Italy, Poland and 12 other countries urged Brussels to propose an EU-wide gas price cap as a way to contain inflation. Other countries are opposed – among them Germany, Europe’s biggest gas buyer, and the Netherlands – which [say capping prices](https://www.financedigest.com/buy-off-plan-to-beat-stalling-house-prices-and-falling-rental-yields-says-jean-liggett.html "“Buy off-plan to beat stalling house prices and falling rental yields” says Jean Liggett ") could undermine energy security this winter. The Commission has also raised doubts, and until Wednesday had suggested the EU instead move ahead with more limited versions of a [price cap](https://www.financedigest.com/eu-meets-to-try-to-break-gas-price-cap-impasse.html "EU meets to try to break gas price cap impasse"). Here are the ways [Europe could cap the price](https://www.financedigest.com/tesla-expands-discounts-with-price-cuts-in-europe-singapore-israel.html "Tesla expands discounts with price cuts in Europe, Singapore, Israel") of gas. [PRICE CAP](https://www.financedigest.com/g7-finance-chiefs-agree-on-russian-oil-price-cap-but-level-not-yet-set.html "G7 finance chiefs agree on Russian oil price cap but level not yet set") ON ALL GAS This is what the 15 EU countries asked the European Commission to propose urgently in a letter, saying a [price cap was “the one measure that will help every member state to mitigate the inflationary pressure”](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure"). European Commission President Ursula [von der Leyen](https://www.financedigest.com/eu-will-propose-windfall-levies-on-energy-firms-von-der-leyen-says.html "EU will propose windfall levies on energy firms, von der Leyen says") in a letter to EU leaders on Wednesday suggested they consider a temporary price cap, while the Commission works on launching an alternative benchmark price to the Dutch Title Transfer Facility (TTF) gas price. We should consider a price limitation in relation to the TTF in a way that continues to [secure the supply of gas to Europe](https://www.financedigest.com/infosecurity-europe-agenda-spotlights-innovation-as-security-leaders-address-cybersecurity-spend-in-the-face-of-economic-headwinds.html "Infosecurity Europe agenda spotlights innovation as security leaders address cybersecurity spend in the face of economic headwinds") and to all member states,” her letter said. She did not specify whether such a cap would apply to all gas trades and import contracts that are pegged to the TTF price, or have a more [limited scope](https://www.financedigest.com/digital-euro-will-be-free-but-limited-in-scope-ecb-says.html "Digital euro will be free but limited in scope, ECB says"). The Commission has been sceptical about a wholesale gas [price cap](https://www.financedigest.com/shell-energy-to-pay-for-overcharging-price-cap-customers-ofgem.html "Shell Energy to pay for overcharging price cap customers -Ofgem") for exchange transactions. In a paper analysing various options last week, the EU executive said a broad cap could be complex to launch, pose [risks to energy](https://www.financedigest.com/britains-tax-take-risks-blowing-green-energy-off-target.html "Britain’s tax take risks blowing green energy off target") security and disrupt flows of fuel between EU countries. That is because in a supply shortage, price signals would no longer be able to drive flows to regions that urgently need gas, while a cap also risked triggering supply disruptions from foreign suppliers, the Commission paper said. It suggested such a cap could work only if a new entity were launched to allocate and [ship scarce fuel](https://www.financedigest.com/oil-spills-and-near-misses-more-ghost-tankers-ship-sanctioned-fuel.html "Oil spills and near misses: more ghost tankers ship sanctioned fuel") supplies between states. NEW GAS PRICE BENCHMARK While a [price cap would be a temporary fix, the Commission wants to implement a more lasting alternative price benchmark for gas in Europe](https://www.financedigest.com/analysis-runaway-prices-have-central-europe-on-the-ropes.html "Analysis-Runaway prices have central Europe on the ropes"). Historically, the gas [price at the Netherlands’ TTF hub has been used as a benchmark for LNG deliveries](https://www.financedigest.com/tesla-posts-record-quarterly-deliveries-after-price-cuts-up-4-from-q4.html "Tesla posts record quarterly deliveries after price cuts, up 4% from Q4") into Europe. But the major reduction of Russian gas supplies this [year has made the TTF price extremely volatile](https://www.financedigest.com/crop-merchant-louis-dreyfus-gets-profit-boost-in-volatile-year.html "Crop merchant Louis Dreyfus gets profit boost in volatile year"), and more expensive than LNG prices in other regions. Brussels [says a new index is needed since the TTF is guided by pipeline supply](https://www.financedigest.com/ceraweek-europe-gas-supplies-to-stay-tight-2-more-winters-equinor-ceo-says.html "CERAWEEK-Europe gas supplies to stay tight 2 more winters, Equinor CEO says") and no longer represents a market that includes more LNG. Some industry [sources have suggested industry should develop](https://www.financedigest.com/china-most-promising-source-of-funds-for-overseas-developers-reveals-investorist.html "China ‘most promising source of funds’ for overseas developers, reveals Investorist") a new benchmark on its own. Its success would depend on whether the gas industry uses it. GAS PRICE ‘CORRIDOR’ Belgium, Greece, Italy and Poland put forward their own [proposal on Thursday for a “dynamic price](https://www.financedigest.com/carrefour-unveils-30-euro-shopping-basket-in-spain-after-government-price-cut-proposal.html "Carrefour unveils 30 euro shopping basket in Spain after government price cut proposal") corridor” for gas. The corridor would apply to all wholesale transactions, not limited to import from specific jurisdictions and not limited to specific use of natural gas,” the countries said a document outlining the “corridor” – a range determined by and lower than the [market price](https://www.financedigest.com/german-residential-property-market-faces-risk-of-price-drop-diw-study.html "German residential property market faces risk of price drop – DIW study"). The document, seen by Reuters, suggested setting the corridor at a level high enough to let the gas market function, and flexible enough to ensure [European countries](https://www.financedigest.com/four-european-countries-call-for-special-treatment-of-defence-in-eu-debt-rules-document.html "Four European countries call for special treatment of defence in EU debt rules – document") can attract supply. If necessary, that could mean allowing gas transactions at prices above the corridor, it said. The gas [price would be able to fluctuate within the corridor range, to keep providing price signals that direct](https://www.financedigest.com/immediate-lift-of-oxford-property-prices-to-result-from-new-direct-high-speed-rail-connection-with-london.html "“Immediate lift” of Oxford property prices to result from new direct high speed rail connection with London") supply to regions that need it, the document said, adding that it should also apply to long-term contracts that are pegged to existing gas price benchmarks. PRICE CAP ON GAS USED FOR ELECTRICITY Von der Leyen said the EU should also consider an EU [price cap specifically on gas used for power](https://www.financedigest.com/belgium-supports-energy-price-caps-suspending-trading-in-eu-power-crunch.html "Belgium supports energy price caps, suspending trading in EU power crunch") generation. European electricity prices are [set by the last power](https://www.financedigest.com/negotiating-our-future-youth-set-to-grab-power-roles-at-cop27.html "‘Negotiating our future’: Youth set to grab power roles at COP27") plant needed to meet demand – typically, a gas plant. Lowering the cost of gas-fuelled power could therefore bring down the overall power [price – though governments would need to compensate gas plants for the gap between the capped price and the higher market price at which they buy](https://www.financedigest.com/4-for-the-price-of-1-what-you-can-buy-in-the-uks-top-northern-cities-for-the-price-of-a-london-pad.html "4 for the price of 1: What you can buy in the UK’s top northern cities for the price of a London pad") fuel. Spain and Portugal implemented a scheme to do this in June – which has helped to reduce local power prices, but at the same time Spain’s gas use increased. The Commission has said any interventions to lower gas prices must be coupled with measures to avoid driving an increase in gas demand when [countries need](https://www.financedigest.com/5-countries-you-need-to-have-an-offshore-account-in.html "5 Countries You Need To Have An Offshore Account In") to save scarce fuel. [PRICE CAP ON RUSSIAN](https://www.financedigest.com/oil-prices-rise-after-opec-keeps-output-steady-russian-price-cap-imposed.html "Oil prices rise after OPEC+ keeps output steady, Russian price cap imposed") GAS The Commission suggested a [Russian gas price cap](https://www.financedigest.com/factbox-u-s-offers-new-details-on-plan-to-cap-russian-oil-prices.html "Factbox-U.S. offers new details on plan to cap Russian oil prices") in September, but dropped the idea after resistance from central and eastern European countries worried Moscow would retaliate by cutting off the gas it still sends to them. Europe relied on Russia for roughly 40% of its gas before Moscow invaded Ukraine. That share has dropped to 9% as Russia has [cut supplies to Europe](https://www.financedigest.com/ford-to-make-call-on-europe-job-cuts-by-mid-feb-as-buyers-circle-german-site.html "Ford to make call on Europe job cuts by mid-Feb as buyers circle German site"). Given the [fall in Russian](https://www.financedigest.com/russian-retail-sales-fall-deeper-jobless-rate-rises-in-sept-data.html "Russian retail sales fall deeper, jobless rate rises in Sept – data") volumes, some EU diplomats said a price cap would do little to reduce European gas prices, and would function as more of a geopolitical move to cut revenues to Moscow. NEXT STEPS The EU country leaders’ discussion on Friday will give a steer to Brussels on what type of measures they would support. EU countries’ [energy ministers](https://www.financedigest.com/exclusive-norway-eyes-high-gas-output-until-2030-says-energy-minister.html "Exclusive-Norway eyes high gas output until 2030, says energy minister") meet on Oct. 11-12 to continue debating gas price caps. The Commission, which drafts EU policies, has said it is ready to propose extra measures to tackle the [energy crisis](https://www.financedigest.com/europes-spend-on-energy-crisis-nears-800-billion-euros.html "Europe’s spend on energy crisis nears 800 billion euros"). Once the Commission puts forward proposals, the bloc’s 27 countries will negotiate them and try to find a final deal. (Reporting by Kate Abnett in Brussels; Editing by John Chalmers, Matthew Lewis and Barbara Lewis) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---