Energy, towards agreement on price cap: EU Council today

A measure that Italy has been asking for for months, yesterday with Draghi and today with Meloni

Today, if all goes as planned, the energy ministers of the 27 EU member countries should agree on the gas price ceiling. It is a measure that Italy has been asking for for months, yesterday with Mario Draghi and today with Giorgia Meloni, to help prevent next spring, the season in which stocks for the winter will have to be filled with “zero Russian gas”, unlike last spring, methane prices are back out of control like last August. French President Emmanuel Macron explained Thursday night that in the last extraordinary Council meeting on December 13, the ministers found “a 90% agreement” and that “the political conditions have been determined so that the main political axes can be fixed on December 19 energy”, of which the price cap is an integral part.

It’s a something, Macron underlined, that must “absolutely be done by the end of the year”. The differences between EU countries in energy policy remain, as is natural for 27 states that have different mixes, but negotiating has led to the creation of the “political conditions” for a compromise. The conditions are soon stated: an agreement is probable because by now there is a qualified majority on the price cap. And even if the leaders agreed in October to proceed unanimously, an agreement between the heads of state and government does not cancel EU law. Therefore, the possibility of reaching a vote, which would put Germany and the Netherlands in the minority, is on the table. It doesn’t happen often, but it does happen.

Berlin is well aware of this possibility, so an agreement is likely, in order to avoid a vote that would see it defeated. An EU source assumes that an agreement will be reached on Monday. However, a non-negligible issue remains on the table, the price threshold beyond which the price of the gas derivative cannot rise: at the extraordinary Energy Council meeting of 13 December it remained in square brackets, with a rather wide range, between 160 and 220 euros . The middle line would be 190 euros: it will be seen on which quota the ministers will converge. The mechanisms under discussion, such as the gas price ceiling, Macron clarified at the end of the European Council last Thursday, “do not serve to lower the average price of gas, but to reduce price volatility”.

The Price caps are not the panacea that will bring bills back to reasonable levels, but it is part of an overall strategy that aims to bring energy prices back on a downward trajectory, given that they are the ones that have exploded double-digit inflation in the euro area, to combat which the ECB is raising interest rates, at the cost of sending the Eurozone into a recession. It was Macron who outlined the strategy that will be pursued at EU level in the coming months, who explained it clearly and lucidly. It is a multi-step process, of which the price cap is a part, but which alone will not solve everything. In the short term, he said, “shield measures” are indispensable, in which the state “takes part of the burden”, as has been the case since the beginning of the war in Ukraine.

There second thing is “buy on the market at cheaper prices”. And, to get there, “the safest way is to have joint purchases and long-term contracts”. For joint purchases, he said, “we have obtained the agreement of the major gas buyers”, who are companies and not states, who “will be around the table next week in Brussels. Italy, Germany, France, Holland and Belgium they agreed.” Then it will be necessary to “negotiate” with the suppliers, that is “Norway, Qatar and the USA: we will make group purchases, with medium-long term contracts. And that was not the way up until now”. Macron recalled that energy policy in recent decades has been inspired by a liberal logic, mainly based on short-term purchases.

A similar system, which works and also saves money in peacetime, breaks down when peace no longer exists, as happened on February 24, 2022, with Russia’s invasion of Ukraine. History got back on track at full speed, definitively overturning the illusions of those who thought that history was over, that by now liberal democracy and the free market would have prevailed everywhere. Therefore, suppliers will be offered long-term contracts, with joint purchases which should allow them to obtain less expensive prices. As mentioned, “anti-volatility mechanisms and the gas price ceiling against peaks” will be introduced. And the goal of all these actions, Macron recalled, “if things go normally, is to bring down the price of gas”.

The goal, continued the French president, is “to bring gas prices towards more reasonable levels in 2023. Not at pre-crisis prices, this is not possible. If the gas price drops, that of electricity will also downward”. If this strategy fails, there is a plan B: “Let’s prepare the Iberian mechanism”, i.e. a ceiling on the price of gas used to produce electricity, like the one implemented by Spain and Portugal, “if it were to prevent electricity prices from rising again”. Iberian mechanism that does not excite several countries, including Italy, but which “is a bridge towards the reform of the electricity market”. It will have to be done “before we have the reform of the electricity market, because once we have done it we will no longer need the Iberian mechanism”.

In short, Macron explained, “these are the stages: in the very short term, we are the ones who continue to finance” the measures necessary to buffer the effects of price increases for citizens and businesses; “the second stage is to bring down gas prices thanks to joint purchases and long-term contracts, and with anti-volatility mechanisms”. For electricity, whose price increase is a direct consequence of the increase in the price of gas, the aim is also in this case to “pull prices down and have the reform” of the electricity market, which currently still electricity to gas.

The strategy is obviously broader: the aim is to “accelerate renewable energy projects”, with the package of measures that in the negotiation was linked to the price cap, together with the rules on solidarity between states. If an agreement is found on Monday, the other two pieces will also pass. Once this is done, Macron said, we must “progress rapidly towards a more electric Europe and advance on the use of low-Co2 hydrogen”, ‘low-carbon’ hydrogen, as Macron calls hydrogen produced using the nuclear energy, which France has in abundance.

Ursula von der Leyen’s executive was asked for texts, Macron continued, to “accelerate on clean energy, ranging from the production of low-Co2 hydrogen for our industries, to batteries, up to renewable or nuclear technologies , in which we must be able to invest faster and attract the best projects”. For this, it will be necessary to “reform the rules on EU state aid”, which are now clearly unsuitable for the new geopolitical framework. Even if not a few member states retain their traditional faith in the ‘invisible hand’ of the market, for Macron “it is not a good idea to remain the only ones to apply rules that other powers no longer apply”.

To finance the colossal investments that Europe will have to make to finance the green transition, which should make it less dependent on foreign countries, Macron recalled that the first thing to think about is using the unused money of RePowerEu, but also to create “new national instruments and Europeans, which we asked the Commission to find”.

In addition to China, which subsidizes its own businesses, the US has also adopted, with the Inflation Reduction Act, a series of measures aimed at promoting and developing green industry made in the USA. To finance all the actions necessary to face the new situation without succumbing even at EU level, Macron is thinking of an instrument “similar to Sure”, the loan mechanism to help states support employment created in 2020 to counter the crisis produced from the Covid-19. Another battle to be waged in the EU which will not be easy, but which was started by Mario Draghi and which will now be up to Meloni to continue.