For several months, Europe has been in the worst energy crisis it has known following its decision to boycott the main energy supplier – Russia – as a protest after it invaded Ukraine. Meanwhile, Europe enters the winter months and the lack of oil and natural gas brings the continent to the brink of panic for fear that it will not be able to satisfy all the needs of the population and heat properly.
In response, Russia raised the price of energy for Europe, and in response, the leaders of the G7 countries decided at the beginning of September on a plan to implement a price cap mechanism on Russian oil exports, with the aim of reducing the Kremlin’s ability to finance its war in Ukraine and better protect consumers against the backdrop of rising energy prices. “We aim to align with the EU’s sixth package of sanctions,” said the finance ministers of the G7 countries.
Many countries, including Germany, have been wary of imposing a limit on fuel prices and of the potential consequences of this policy on the market. German Chancellor Olaf Schulz said that this “always entails a risk that the producers will sell their gas elsewhere.” However, after negotiations with his European colleagues, Schultz agreed to go ahead with the measure – albeit with caveats such as the need to design it in a way that would not increase consumption.
The Prime Minister of Belgium, Alexandre de Crewe, said that Germany’s concerns are legitimate concerns and that the agreement of the heads of state is considered a big step forward. The Prime Minister of Luxembourg, Xavier Betel, also noted that there were many difficulties in order to reach agreements, but these were resolved during the summit.
Dynamic price ceiling
The political support of all 27 heads of state means that in the coming weeks, European energy ministers and the European Commission – the EU’s executive arm – will work out the technicalities of how the price cap mechanism works.
Currently, European natural gas prices are reflected through a Dutch transmission facility, but EU leaders have agreed that this no longer reflects the reality that most receive liquefied natural gas rather than pipeline gas, so they plan to set a second benchmark by the end of the first quarter of 2023.
Gas prices in Europe soared following the tensions with Russia, which used to be Europe’s main exporter of natural gas. At their peak, prices climbed above 340 euros ($332.6) per megawatt hour in late August. Markets seem to have welcomed the outcome of the EU leaders’ meeting with prices falling from around 127 euros per megawatt-hour yesterday to 110 euros per megawatt-hour today.
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