Hungary Orbán expects 'huge debate' in EU summit on energy crisis solutions
Not everyone is happy about gas price cap proposal
As at least 15 to 17 member states stood behind the idea of some kind of gas price cap in the EU, the European Commission on Tuesday proposed a new emergency regulation to address high gas prices in the bloc and ensure security of supply this winter.
This will be done through
- joint gas purchasing,
- price limiting mechanisms on the TTF gas exchange,
- new measures on transparent infrastructure use and solidarity between Member States, and
- continuous efforts to reduce gas demand.
As this is proposed by the Commission as an emergency measure, it would be sufficient to have a qualified majority in the Council, which means that at least 15 Member States, representing at least 65% of the total EU population, would have to support the package.
Germany, the member state with the largest weight (both in terms of the economy and population), remains steadfastly opposed to the price cap (see the German Chancellor's speech today below), while the second, third, fourth and fifth largest economies are in favour. The price cap is also opposed by the Dutch, Austrian and Hungarian governments.
Many EU countries also believe it’s time to talk about a revival of SURE (the system that allowed the EU to protect jobs during the pandemic via joint loans) or NextGenEU (used to finance new investments) while other countries believe the EU should first spend the money that it already has, Politico reported.
At a briefing to prepare for the summit, a German official did not amuse journalists when he repeatedly said he hoped the closing press conference “will hopefully still happen on Friday” — suggesting the leaders’ discussions could go into overtime Saturday.
Key elements of the emergency regulation
The proposed emergency regulation contains the following main elements:
- Aggregation of EU demand and joint gas purchasing to negotiate better prices and reduce the risk of Member States outbidding each other on the global market, while ensuring security of supply across the entire EU;
- Advancing work to create a new LNG pricing benchmark by March 2023; and in the short term proposing a price correction mechanism to establish a dynamic price limit for transactions on the TTF gas exchange, and a temporary collar or bandwidth to prevent extreme price spikes in derivatives markets;
- Default solidarity rules between Member States in case of supply shortages, extending the solidarity obligation to Member States without direct pipeline connection to involve also those with LNG facilities; and a proposal to create a mechanism for gas allocation for Member States affected by a regional or Union gas supply emergency.
The Commission believes that in combination with already agreed measures on gas and electricity demand reduction, gas storage, and redistribution of surplus energy sector profits,
these new steps will improve stability on European gas markets this winter and beyond, and will also help to further mitigate the price pressure felt by European citizens and industry, while ensuring security of supply and a functioning internal market.
In addition, the Commission will carry out a needs assessment on REPowerEU to speed up the clean energy transition and avoid fragmentation in the single market, with a view to making proposals to enhance the EU financial firepower for REPowerEU.
The Commission is also proposing a targeted flexible use of Cohesion Policy funding to tackle the impact of the current energy crisis on citizens and businesses, using up to 10% of the total national allocation for 2014-2020, worth close to €40 billion.
Challenged by Berlin and Budapest
Germany Chancellor Olaf Scholz has challenged EU proposals for a ceiling on gas prices before today's summit, telling the Bundestag that a “politically set price cap” on gas would risk diverting gas to other countries that offer a higher price, undermining European efforts to shore up supplies as Russia cuts exports to the bloc following the invasion of Ukraine, the Financial Times reported.
"The EU must coordinate closely with other gas consumers like Japan and Korea so as not to be in competition with each other," Reuters cited him as saying.
"At the same time we are also talking with producers about an appropriate price. I am convinced: countries like the U.S., Canada or Norway, who stand with us on Ukraine's side, have an interest in Europe's energy not becoming unaffordable."
Hungary's Prime Minister Viktor Orbán opposed the gas price cap on Facebook and Twitter.
The latest proposal of Brussels on the gas cap means a gas embargo for Hungary in its current form. Enough with the misguided brussels sanctions!
He said in a post in Hungarian on his Facebook page, pursuing the 'double game' of demonising the EU at home while supporting all of the EU sanctions put in place against Russia for the war it is waging in Ukraine.
In the same vein, Minister of Foreign Affairs and Trade Péter Szijjártó stressed in a Facebook video yesterday that the price cap would reduce gas supply, driving up prices in the EU, and that the proposal is therefore dangerous and rejected by the government.
Another captivating proposal
As Russian pipeline gas supplies fall dramatically (to well below 100 bcm for the year as a whole this year) from the previous 150-160 bcm of the roughly 400 bcm of gas consumed in the EU annually, and are increasingly replaced by liquefied natural gas (LNG) supplies, this transformation is fundamentally distorting the pricing environment on the TTF exchange.
The distortion and high prices are largely caused by the gas shortage in the EU, because, as Mol Group Chairman-CEO Zsolt Hernádi said at the Portfolio conference yesterday: even with the decrease in Russian deliveries and the increase in other deliveries, there will still be a shortage of around 35 billion cubic metres of gas on the EU market.
The Commission is also proposing a more targeted intervention in market gas prices. Many gas contracts in Europe are indexed to the main European gas exchange, the TTF, which no longer accurately reflects the price of LNG transactions in the EU. The Commission is therefore developing a new complementary price benchmark with the Agency for the Cooperation of Energy Regulators (ACER) to address this systemic challenge.
"The new benchmark will provide for stable and predictable pricing for LNG transactions. Under the proposed Regulation, the Commission would task ACER to create an objective daily price assessment tool (no later than two weeks after the regulation enters into force) and subsequently a benchmark (by 31 March 2022) that could be used by energy market operators to index the price in their gas contracts," the Commission said.
Thus, in addition to the TTF, which is mainly used for pipeline gas transactions, another benchmark market for LNG imports would be created by next spring, and if an extreme gas market situation and prices were to come to pass on the TTF by spring, for example as a result of the Russian threats, the Commission would apply the dynamic price cap system described above on the TTF and other exchanges.
While this benchmark is being developed, the Commission proposes to put in place a mechanism to limit prices via the main European gas exchange, the TTF, to be triggered when needed.
The price correction mechanism would establish, on a temporary basis, a dynamic price limit for transactions on the TTF. Transactions at a price higher than the dynamic limit would not be allowed to take place in the TTF. This will help avoid extreme volatility and excessive prices.
In addition, to limit excessive price volatility and prevent extreme price spikes in the energy derivatives markets, the Commission proposes introducing a new temporary intra-day price spike collar to be established by EU derivatives exchanges. This mechanism will protect energy operators from large intra-day price movements.
To ease the liquidity issues many energy companies currently face in meeting their margin requirements when using derivative markets, the Commission has adopted new rules for market participants, expanding the list of eligible collateral on a temporary basis to non-cash collaterals, including government guarantees.
Secondly, the Commission has adopted new rules increasing the clearing threshold from €3 billion to €4 billion. Below this threshold, non-financial firms will not be subject to margin requirements on their OTC (over-the-counter) derivatives. Both these measures will provide much needed relief for companies, while also maintaining financial stability.
The introduction of these measures follows extensive consultation with European and national regulators, as well as stakeholders and market participants. Finally, ACER and the European Securities and Markets Authority (ESMA) are enhancing their cooperation, by creating a new joint Task Force, to strengthen their capabilities to monitor and detect possible market manipulation and abuse in Europe's spot and derivative energy markets, as a precautionary measure to protect the stability of the market.
Joint purchasing
While the EU has made strong progress on filling its gas storage for this winter, achieving over 92% filling as of today, we need to prepare for possible further disruption, and lay a sound foundation for the following year, the Commission said.
Therefore, we propose to equip the EU with new legal tools to jointly purchase gas.
The Commission would contract a service provider to organise demand aggregation at EU level, grouping together gas import needs and seeking offers on the market to match the demand. We propose a mandatory participation by Member States' undertakings in the EU demand aggregation to meet at least 15% of their respective storage filling targets.
Companies would be allowed to form a European gas purchasing consortium, in compliance with EU competition rules. Joint purchasing will help smaller Member States and companies in particular, which are in a less favourable situation as buyers, to access gas volumes at better conditions.
The Regulation also includes provisions to enhance transparency of intended and concluded gas supply purchases, in order to assess whether the objectives of security of supply and energy solidarity are met, the Commission added.
The EU executive should be informed before the conclusion of any gas purchase or memorandum of understanding above a volume of 5TWh (just over 500 million cubic meters) and may issue a recommendation in case of a potentially negative impact on the functioning of joint purchasing, the internal market, the security of supply or energy solidarity.
Hungary's Orbán is not happy about this idea either, expecting a "huge debate" at the upcoming summit.
Brussels latest plan on joint gas procurement reminds me of the time we bought vaccines together. Slow and expensive. I expect a huge debate at the upcoming . #EUCO
— Orbán (Viktor) October 19, 2022
One reason behind the criticism may be that the Hungarian government may fear that the joint EU gas procurement is in fact a way to force the country out of the Russian gas purchase contract and into gas purchases from other sources, which it considers a problem for the security of supply, timing and pricing.
It cannot be ruled out either that this concern was also based on the fact that the Dutch government has recently withdrawn the licence of a company carrying out part of the maintenance work on the Turkish Stream pipeline (the only pipeline currently delivering gas to Hungary), making maintenance and Hungary's access to Russian gas in the medium term uncertain. Yesterday, however, Péter Szijjártó announced that the Dutch had returned the export licence of the company in question, so that there is no obstacle to carrying out maintenance work on the Turkish Stream.
Solidarity and demand reduction
The Commission is closely monitoring demand reduction measures. Preliminary analysis on the basis of reporting by Member States shows that in August and September EU gas consumption would be around 15% lower than the average of the previous five years. Similar efforts will be needed every month until March in order to comply with the Council Regulation. Member States will report every two months on their progress.
The Commission stands ready to trigger the EU Alert or review such targets if current measures prove insufficient.
To reinforce preparedness for possible emergencies, the Commission also proposes measures allowing Member States to further reduce non-essential consumption to ensure that gas is being supplied to essential services and industries, and to extend solidarity protection to cover critical gas volumes for electricity generation. This should under no circumstances affect the consumption of households that are vulnerable customers.
As not all Member States have put in place the necessary bilateral solidarity agreements, the Commission proposes setting default rules. This will ensure that any Member State facing an emergency will receive gas from others in exchange for fair compensation.
The obligation to provide solidarity will be extended to non-connected Member States with LNG facilities provided that the gas can be transported to the Member State where it is needed. To optimise 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 booked and left unused by market operators.
The Commission is also proposing a Council Recommendation on critical infrastructure protection in light of the suspected sabotage of the Nord Stream 1 & 2 gas pipelines.
This could also be good for Hungary in the event of a gas supply crisis (e.g. in the event of a Turkish Stream shutdown), because Hungary would need to be helped out by its neighbours, and vice versa.
The public should understand that the energy crisis is not likely to be resolved in the immediate term and that there will be two to three difficult winters ahead, The Irish Times cited Frans Timmermans, the European Commission's executive vice-president, as saying on Tuesday.
“This is going to take about three years until we really have enough houses insulated, enough heat pumps installed, enough solar panels installed, enough wind capacity,” he said.
Next winter will be even more challenging, he predicted, because the EU will not be able to refill its storage facilities from Russian gas.
Plenty of 'food' on the debate buffet - New sanctions on their way?
The EU has already devised eight packages of sanctions against Russia over the invasion of Ukraine, but several EU capitals are pushing for more, Politico reported on Thursday.
Poland, Latvia, Lithuania and Estonia on Thursday presented a new list of potential future sanctions against Russia.
The document, seen by Politico, includes more suggested restrictions on technology and energy, such as a ban on cooperating with Russia on nuclear energy. And it proposes further import restrictions on products like Russian diamonds.
The four countries are expected to raise the issue at Thursday’s meeting of EU leaders, although a next sanctions package against Russia isn’t expected in the short term, diplomats said.
Meanwhile, the EU today officially adopted new sanctions against Iran amid reports Moscow has used Iranian drones to strike civilian targets in Ukraine.
Cover photo: European Council's media library on the informal EU summit in Prague in October 2022
