EU considers gas price cap as a way to control rising energy costs

The European Union is considering measures to?reduce energy prices. This includes capping gas price, said European Commission President Ursula von der Leyen on Wednesday. Before the Iran War caused oil and gas to surge, Brussels was drafting proposals for industries who claim that high energy costs make it impossible to compete with their rivals in China or the United States.

Von der Leyen, European Parliament: "It's crucial to reduce the cost impact when gas sets the price of electricity."

She said: "We're preparing different options, including better use of contracts for difference and power purchase agreements; state aid measures and exploring the possibility of subsidising or capping gas prices."

The EU's electric system is set up so that the price of electricity is determined by the last power station needed to meet the total demand. Gas plants are often the last power plant needed to meet total demand. This can cause electricity prices to rise, even if most of the energy is produced by cheaper nuclear or renewable sources.

Gas price caps are likely to cause divisions among EU governments. In 2022, the EU implemented a cap on gas prices after Russia invaded Ukraine, cutting off gas supplies to Europe. This pushed gas prices to new highs, forcing some industries to close. The cap was supposed to kick in when European gas prices reached 180 euros per megawatt-hour. The cap was never activated and expired last year.

Germany and the Netherlands were among those who opposed the cap, warning that it would hamper Europe's capacity to secure fuel in a time of crisis, especially if Asian buyers could outbid European buyers for liquefied natural gas cargoes. Since the start of the Iran War, some LNG tankers bound for Europe have shifted towards Asia as buyers scramble to find replacement cargoes.

Von der Leyen said that returning to Russian energy would be "a strategic mistake" and make Europe more vulnerable. Viktor Orban, Hungary's prime minister, asked the EU this week to lift energy sanctions against Russia that prohibit most Russian oil imports in order to reduce prices. (Reporting and editing by Jan Strupczewski, Makini Brice, Bart Meijer; Writing by Bart Meijer)

(source: Reuters)