The energy crisis, one of the most important consequences of the Russia-Ukraine War, has caused the European Union (EU) to try many methods to avoid Russian energy, on which it has been dependent for many years. In order to reduce the high prices caused by the energy crisis, the Group of Seven (G7) countries decided to impose a ceiling price on oil; however, this application has caused serious discussions for natural gas.
The debate over whether to intervene in the continent’s gas market has become one of the most divisive elements in the EU’s response to Moscow’s war and pressure on the continent’s energy supply. While some countries say that a price cap is needed to ease the burden of high prices on consumers and businesses; some actors also voice their concerns that such a move could lead to famine.
Although countries such as Norway, Bulgaria, Croatia, Greece, Italy and Slovenia criticize the EU’s efforts to set an upper limit on natural gas prices, the Union’s Energy Ministers on 19 December 2022, after months of long discussions, served as the European benchmark of the TTF. agreed to trigger a cap if prices exceed 180 euros per megawatt hour for three days in the issuer contract.[1]
Concern about the decrease in natural gas supply was the determining factor in the delay of taking the relevant decision. As a matter of fact, due to the aforementioned concern, the Netherlands and Austria abstained from the negotiations and insisted that the upper limit would endanger Europe’s energy security. This situation not only draws attention to the ambivalent structure within the EU, but also reveals the fears about the success of the gas ceiling price.
Although it is still early to assess its final impact, this new application will not be a magic wand, given the EU’s long-standing dependence on Russian energy. Moreover, it carries the risk of adversely affecting the markets, which have been quite fragile recently.
In this context, Brussels agreed with the European Central Bank (ECB), the Energy Regulatory Cooperation Agency (ACER) and the European Securities and Markets Authority (ESMA) to submit a data report to inform about possible adverse effects before the mechanism enters into force. The European Federation of Energy Traders commented as the first reaction to this new step:[2]
“Even in a short-term intervention, serious, unexpected and irreversible results can occur by damaging the confidence that the gas is known and transparent.”
According to the ESMA report dated January 23, 2023, which evaluates the effects of the “market correction mechanism” that will come into effect on February 15, 2023, the ceiling price approaching the European gas contract may suddenly change the gas market and affect the functioning of other markets and financial stability.[3] EU Energy Commissioner Kadri Simson, following the release of several reports highlighting its risks although not yet in effect, said: “The Commission is ready to suspend activation of the mechanism if an analysis from the ECB, ESMA and ACER shows that the risks outweigh the benefit.”[4] said. On the other hand, the fact that the effects of the mechanism on the market cannot be fully predicted before it is implemented remains uncertain.
It should also be noted that in the uncertain geopolitical environment created by Russia’s invasion of Ukraine and the decision of the Moscow administration to significantly reduce gas distribution to the EU, it will not be easy to set position limits, especially in terms of calculating the deliverable supply.
Moreover, authorities often highlight the negative impact of this “untested and unprecedented” practice on consumers. Therefore, although it reserves the possibility of “suspension”, the measures planned by the EU may not be valid after the effects are seen. In this case, Brussels will have shot itself in the foot with the said decision. This decision, taken despite the warnings of EU regulatory bodies as well as the countries that reacted to the decision from the very beginning, may cause the “integrity and determination” of the union to be questioned if it does not have the expected effect.
After the start of the war, it is seen that the “unity and decision-making mechanism” of the EU were frequently criticized. Because it can be said that Brussels did not make the expected moves regarding Ukraine and Russia and the steps taken did not bring the expected results. In this case, the gas ceiling price application is important in terms of experiencing how much the EU can provide the necessary defense against the rhetoric of “Russia’s use of energy as a weapon”.
As a result, the mechanism in question will show to what extent the EU can respond to Russia and, in this context, to the energy crisis. It can be said that this decision of Brussels will be criticized for a long time, considering that the risks and negative effects of the analyzes and reports are frequently emphasized, although it is only a short time away from its entry into force. In addition, Russia’s deterrent and preventive moves over natural gas may increase if the markets deteriorate. Therefore, in case of failure of the implementation, very difficult days await the EU.
[1] “EU Countries Agree Gas Price Cap to Contain Energy Crisis”, Reuters, (https://www.reuters.com/business/energy/eu-countries-make-final-push-gas-price-cap-deal-this-year-2022-12-19/, (Date of Accession: 24.01.2023).
[2] “EU Ministers Agree on Gas Price Cap of €180 MWh” Oil Price, https://oilprice.com/Latest-Energy-News/World-News/EU-Ministers-Agree-On-Gas-Price-Cap-Of-180-MWh.html, (Date of Accession: 24.01.2023).
[3] “EU’s Looming Gas Price Cap Could Trigger Abrupt Market Changes”, Bloomberg, https://www.bloomberg.com/news/articles/2023-01-22/what-are-the-possible-market-impacts-of-the-new-eu-gas-price-cap#xj4y7vzkg?leadSource=uverify%20wall, (Date of Accession: 24.01.2023).
[4] “Press remarks by Commissioner Simson at the Energy Council”, European Comission, https://ec.europa.eu/commission/presscorner/detail/en/speech_22_7841, (Date of Accession: 24.01.2023).
