EU energy ministers will gather for emergency talks in Brussels on Friday to thrash out common measures in an effort to counter a gas and electricity price crisis that threatens to make energy bills unaffordable for households and businesses and tip Europe into recession.
The European Commission president, Ursula von der Leyen, has set out a five-point plan, which includes a price cap on Russian gas that is likely to draw strong opposition from some member states.
Her proposals also include a windfall tax on oil and gas profits; an energy savings drive; and a cap on the cost of low-carbon electricity. They were published the day before Britain’s new prime minister, Liz Truss, unveiled a £150bn freeze on energy bills.
A senior diplomat said there was no majority in favour of capping Russian gas, a measure designed to limit Kremlin revenues used to finance the war in Ukraine.
Vladimir Putin has dismissed the idea as stupid and threatened to completely cut energy supplies to Europe if the plan goes ahead. Because Russia now only supplies 9% of the EU’s gas imports, down from 40% before the war, the European Commission believes it can manage the risk of a total shutdown.
But a trio of EU member states that import a large amount Russian gas from Russia – Austria, Hungary and Slovakia – oppose the idea. Hungary, which is highly dependent on gas from Russia recently signed a contract with the Russian state energy firm Gazprom for extra supplies, argues the price cap is a sanction and should only be decided by unanimity, giving Budapest veto power over the decision.
On the other hand, a dozen other countries, including France, Italy and Poland, support a cap, but argue it should apply to all imported forms of the fuel, including liquified natural gas (LNG). A former top civil servant at the European Commission’s directorate-general for energy, Philip Lowe, told the Guardian he supported that position.
“If the objective is to protect European businesses and households from the current high gas prices [and not just impose a further sanction on Russia] a wholesale price cap needs to be applied to any gas regardless of its origin,” said Sir Philip Lowe, now a partner at the Oxera economics consultancy.
“The market for gas, whether transported as LNG or by pipeline, is increasingly part of one global market and world demand for gas is growing, so capping prices in only one segment of the market won’t be enough,” Lowe added.
Germany is undecided, but fears the policy risks spoiling EU unity; the Netherlands has voiced reluctance over any price cap, arguing it contradicts the EU’s goal of boosting supplies of tanker gas.
When it comes to gas, “Europe has two problems: quantity and price”, said Dr Simone Tagliapietra, a senior fellow at the Bruegel thinktank. “We need to tackle the second problem without making the first worse. That is the difficult trade-off policymakers are facing. And if we put a cap on all gas we might risk to compromise the first point, which is the ability to secure the volumes in the winter.”
There is more consensus about other parts of the European Commission’s plan, such as windfall taxes on oil and gas companies that have reaped large profits from turbulence in the energy market. Unlike the UK where Truss has ruled out new windfall taxes, France, Germany, Italy and Spain are among EU countries that have promised or introduced levies on extraordinary profits to fund their support programmes for struggling households.
EU governments are also supportive of an efficiency drive to reduce demand for electricity, although many capitals think the targets should be voluntary, rather than mandatory, as favoured by Brussels. Across Europe energy savings campaigns are gaining momentum: this week French citizens have been urged to turn down heating and air conditioning, while Italians were asked to turn off the hob once pasta water starts boiling.
Several governments are anxious not to dilute EU climate goals: Germany, Spain and the Nordic states are vying to protect the European emissions trading system (ETS), the bloc’s flagship scheme to cap industrial pollution. As energy prices have risen, Poland has resumed its long-standing campaign to cap the price of ETS permits, which opponents fear blunts the signal to cut pollution.
Also gaining broad support are plans to tweak EU state aid rules and market regulations, amid growing concern that utility companies could be forced into insolvency due to a lack of cash. Earlier this week Finland and Sweden announced plans to offer billions of euros in liquidity guarantees. Utility companies trading electricity futures are facing growing demands from banks to deposit more cash (margin requirement) as a safety net. Finland’s government said that without €10bn (£8.7bn) of liquidity support the sector risked “a kind of a Lehman Brothers”, referring to the bankruptcy of the US investment bank in 2008 that was widely seen as triggering the financial crisis.
On Thursday, the UK signalled it was set to follow suit, with a £40bn liquidity facility for energy companies underpinned by the Bank of England.
The European Commission is expected to publish formal legal proposals on the energy plan next Wednesday when Von der Leyen gives an annual speech outlining her policy programme for the year ahead.
Diplomats predicted the discussions would be complex, as EU member states have very different energy mixes and varying exposure to a potential Russian gas shutdown.
“What is easily implementable in country A could be impossible to implement in country B,” one senior diplomat said. “But there is an openness from everyone to look at [these proposals], which is different from two or three months ago.”