Energy crisis: The role of Germany, the cohesion of the European Union and the proposals of the Commission

When the war started in Ukraineenergy prices were already at record highs, with an upward rally starting from September 2021. The Russian invasion, the -imposed- sanctions imposed by the European Union and the hybrid war launched with the West, in retaliation, Vladimir Putin, had the effect of intensifying the problem to the extremes and reaching the current – potentially – impasse, in an explosive combination of precision, and a possible lack of energy products.

Although winter is just around the corner, Europe appears to be dangerously stalling, following the well-known policy of procrastination. The Summit on Thursday and Friday is more than critical. The 27 leaders are called upon to make decisions. In this case, however, decisions about measures against the energy crisis and accuracy may take a back seat, as something much more important, much more profound, is at stake. Such unity of Europe…

The 27 leaders have not overcome their differences on the issue of the cap on natural gas prices, or even on a common line towards Russia and dealing with the energy crisis. But something like this always happened. As a rule, the law of the strongest prevailed, which in the case of the EU is the Germany.

This is exactly where everything is judged. The Commission, two days before Summit meeting, submitted its new proposal, which is based on three axes. The big question that arises is the following: How will Germany react?

Germany – as highlighted by the 200 billion euro package – seems to have charted its own course, insisting on its positions on natural gas and constantly prolonging decision-making at the general level, in order to buy time and prepare the same for the difficult winter that is coming, but also – not much more – for the next winter, when the reserves that have been secured will no longer exist.

Its consistency The European Union passes – necessarily – through Berlin. Germany is called upon to decide whether it will henceforth function as… Germany, or as the steam engine of the EU. It is called upon to show the way to every… Hungary, which is leaning towards Moscow.

Tomorrow’s Summit will prove a lot for Europe as the crisis presses ever deeper, shaping a new world, with new facts and new alliances.

The Commission’s proposals ahead of the Summit

The Commission is proposing a common gas market, a price capping mechanism on the TTF gas exchangesolidarity mechanism between member states and continuous efforts to reduce natural gas demand.

Common gas market from the EU

The Commission proposes common natural gas markets to negotiate better prices and avoid competition between member states.

The Commission will commission a service provider to organize EU-wide demand aggregation, pooling gas import needs and looking for offers on the market to match the demand. It proposes the mandatory participation of the member states in joint procurement, to collect at least 15% of the storage filling. Companies will be able to form a European gas purchasing consortium, under EU competition rules. Joint purchases will help smaller member states and in particular companies, which are in a less favorable position as buyers, to access in natural gas volumes with better conditions.

The Regulation also includes provisions to enhance the transparency of the intended and final gas supply markets in order to assess whether the objectives of security of supply and energy solidarity are being met. The Commission should be informed before the conclusion of any natural gas market or memorandum of understanding with a volume of more than 5 TWh (just over 500 million cubic meters) and may issue a recommendation in the event of a potentially negative impact on the functioning of the common market, the security of supply or energy solidarity.

Dealing with high gas prices

The Commission proposes to establish a new pricing index for Liquefied Natural Gas (LNG) by March 2023 and in the interim proposes to establish a price correction mechanism to establish a dynamic price ceiling for trading on the TTF natural gas exchange.

“The European natural gas exchange, the TTF, no longer accurately reflects the price of LNG transactions in the EU,” the Commission stresses. Therefore, the Commission proposes to develop a new complementary price reference point with ACER (European Agency for the cooperation of energy regulators) to address this ‘systemic challenge’. The new benchmark will provide stable and predictable pricing for LNG transactions. The Commission will commission ACER to create an objective daily price assessment tool and, in then a reference point that could be used by energy market operators to adjust the price in their natural gas contracts.

Until the above is done, the Commission proposes the establishment of a temporary mechanism for limiting prices, through the European Gas Exchange (TTF), which will be activated when necessary. The price correction mechanism will establish, on a temporary basis, a dynamic price limit for transactions on the TTF. Trades at a price higher than the dynamic limit will not be allowed to take place on TTF. This will help to avoid extreme volatility and excessive prices. In addition, to limit excessive price volatility and prevent extreme price increases in energy derivatives markets, the Commission proposes to introduce a new temporary intraday price spike to be generated by EU derivatives exchanges. This mechanism would protect energy operators from large intraday price fluctuations.

Solidarity and demand reduction

The Commission proposes a solidarity mechanism between Member States in the event of supply shortages.

The Commission is closely monitoring measures to reduce natural gas demand. In August and September, gas consumption in the EU was around 15% lower than the average of the previous 5 years. Similar efforts will be required every month until March, according to the Council regulation. Member States will report every two months on their progress. The Commission stresses that it is “ready to activate the EU alert” or to review the reduction target if current measures prove insufficient. To strengthen preparedness for potential emergencies, the Commission is proposing measures allowing Member States to further reduce non-essential consumption to ensure gas is supplied to essential services and industries. “This should in no way affect the consumption of households that are vulnerable customers,” the Commission stresses.

Since not all Member States have concluded the necessary bilateral solidarity agreements, the Commission is proposing rules to ensure that each Member State facing an emergency receives gas from others, in return for a “fair compensation”. The solidarity obligation will be extended to non-connected Member States with LNG installations, provided that the gas can be transported to the Member State where needed. To optimize the use of LNG and pipeline infrastructure, the Commission proposes new tools to provide information on available capacity and new mechanisms to ensure that capacity is not tied up and not used by market players. It is also proposed to protect critical infrastructure in light of the suspected sabotage of the Nord Stream 1 & 2 gas pipelines.

Also, the Commission proposes to use 10% of the Cohesion Fund for the period 2014-2020, worth approximately 40 billion euros, to deal with the energy crisis.

The Commission intends to put forward proposals to strengthen the EU’s financial firepower for REPowerEU, to speed up the transition to clean energy and avoid fragmentation in the single market.

According to the Commission, its new proposals, combined with already agreed measures to reduce natural gas and electricity demand, store natural gas and redistribute excess energy sector profits, will improve stability in European natural markets. gas this winter and beyond. The Commission also stresses that the measures it is proposing today “will help to further alleviate the price pressure felt by European citizens and industry, while ensuring security of supply and a functioning internal market”. The Commission will continue its work in other areas, including the review of the Interim Crisis Framework for state aid, as well as ways to limit the impact of high gas prices on electricity prices.

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