Capping the European price of gas

Abstract

The price of gas in Europe has increased manifold over the last year. Beyond several measures adopted at Member State level to cushion the impact of high energy prices on consumers, imposing a cap on the price of gas in the EU is now being discussed. This Policy Brief proposes a strategy for implementing a cap on the price of gas in the EU, in case this is decided at political level. The strategy is based on the assumption that the European gas market could be considered as composed of two segments: (i) the gas produced in the EU or imported into the EU through pipelines (also called ‘pipeline gas’) and (ii) the gas imported into the EU as liquefied natural gas (LNG). We also assume that external exporters of pipeline gas to the EU have limited opportunities to redirect this gas to the international LNG market. The strategy is composed of two main elements: (i) the adoption of measure(s) to reduce the price of pipeline gas traded in the EU and (ii) the sourcing, on the global market, of any additional LNG volumes required in the EU through auctions organised by a Single Buyer entity (or by TSOs). The reduction of the price of pipeline gas in the EU could be achieved by (a combination of) two measures. One is based on the use of the technical functionalities employed by gas exchanges, such as the Interval Price Limits of the Intercontinental Exchange. Regulation could be applied to these technical parameters to steer the prices on the gas platforms downwards. The other measure is based on the balancing role of the TSOs and a regulatory mandate to buy and sell any quantity of balancing gas at a predefined price or price range.