EU Backs Energy Measures as Germany Yields on Gas Price Cap

(Bloomberg) -- The European Union agreed to press ahead with a set of emergency actions to address the bloc’s energy crisis, with Germany yielding to pressure from other member states to pave the way for a temporary price cap on natural gas. European natural gas prices fell after the accord.

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“We sent also a clear signal to the market,” European Council President Charles Michel said at a news conference early Friday. “It means that we are ready to act together, that we are able to work together and there’s strong political willingness. I’m confident that there will be an effect very soon.”

German Chancellor Olaf Scholz came into the meeting firmly opposed to more radical interventions in the gas market, even as a majority of the bloc’s 27 nations were seeking a political endorsement of a price cap.

After hours of intense negotiations, the leaders asked the EU’s executive arm to propose a “temporary dynamic price corridor on natural gas transactions to immediately limit episodes of excessive gas prices,” they said in their joint summit conclusions. They also said they would pursue a temporary framework to cap the price of gas in electricity generation, including a cost and benefit analysis.

Natural gas in Europe fell, with benchmark futures declining as much as 4.8% on Friday and headed for a third straight weekly loss.

“We will develop a complementary new index to reflect better the LNG price situation and for the meantime we will establish a market correction mechanism to limit episodes of excessive gas prices,” European Commission President Ursula von der Leyen said at a news conference. “We will work with energy ministers to submit a legal proposal to operationalize the market mechanism.”

Leaders also asked for steps to avoid extreme price spikes and to use their joint purchasing power as leverage in negotiations with global gas suppliers. Joint purchasing would be voluntary but with a requirement for 15% of the volume needed to fill gas storage to be bought as a bloc.

EU leaders will meet Friday for the second day of their summit, with economic issues on the agenda. The bloc’s energy ministers will meet next week to continue trying to hash out the details of the various plans.

Countries including France, Italy and Poland had been pushing hard to limit the cost of gas, which is roiling economies and fueling inflation as the region heads for a winter with drastically reduced shipments from Russia after its invasion of Ukraine. If the bloc can’t agree on significant enough steps, it risks having national government take diverging routes to address the fallout.

Price Spikes

“There is a lot to do to make this concrete, but we need to find a concrete way to limit these,” Scholz said after the meeting, referring to price spikes.

French President Emmanuel Macron said the aim is to have explicit mechanisms laid out in the next two to three weeks.

“The fact that we found an accord tonight and showed our determination shows a clear signal to markets of our determination,” he told reporters.

But Dutch Prime Minister Mark Rutte said it is “very difficult to see” that the price cap could be ready within the next few weeks. “We really have to assess all the pros and cons and the ramifications,” he told reporters. “If it would not fulfill the requirements, for example, could also lead to a higher base price or gas sailing away from Europe.”

The leaders also stressed the need for Europe to pursue joint action to alleviate the impact of the crisis on companies and consumers, maintaining the level playing field and avoiding undermining the bloc’s single market.

Germany’s €200 billion ($195 billion) plan to shield its national companies and households from high energy prices has come under criticism from member states that worry it would cause irreparable imbalances within the bloc.

Heading into the summit, Michel said it was a “moment of truth” for Europe as it confronts the toughest winter in decades, with economies staggering under the double blows of high inflation and record energy prices.

Read more: Europe Racks Up $700 Billion Energy Tab as Fiscal Battle Rages

European natural gas prices have declined by more than 60% since the peak in August, with strong flows of liquefied natural gas helping to replace Russian supplies and fill up storage sites. A mild start to the winter heating season has also helped damp demand but temperatures are set to drop as winter kicks in and gas prices are likely to rise in the coming months.

Industry and households’ ability to cut consumption in response to high prices will be key to managing shortages. On the supply side, Europe needs to continue attracting LNG cargoes ahead of buyers in Asia.

--With assistance from Alberto Nardelli, John Follain, Milda Seputyte, Ania Nussbaum, Birgit Jennen, Patrick Donahue, John Ainger and Slav Okov.

(Updates with market reaction in first, fifth paragraphs)

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