Gas reserves, subsidies and tax cuts: the EU’s tools to combat energy price spike

European energy supply is not at immediate risk despite low gas storage levels ahead of the winter, but the European Commission is working with other gas-producing countries to increase supply, the European Union’s executive said on Wednesday.

European gas and power prices have surged this year as demand has shot up all over the world for energy amid economic recovery from the coronavirus pandemic.

The region has had to compete with Asia for liquefied natural gas (LNG) where demand is also high, amid low storage levels, infrastructure outages and lower than usual supply from Russia.

The European Commission outlined measures the EU could use to combat surging energy prices, and said it would explore the possible benefits of joint gas purchasing among countries as a way to cushion price spikes.

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“While energy price fluctuations have occurred in the past, the current situation is exceptional as European households and companies face the prospect of higher energy bills at a time when many have been hit by loss of income due to the pandemic,” the commission said in a communication on energy prices.

The current level of gas storage in Europe is less than usual, at slightly above 75 per cent full compared with a 90 per cent average at this time in the last 10 years, the commission said.

This would be adequate in a winter similar to the previous one but the weather will be a variable to watch, it added. The commission said it was working with the European Network of Transmission System Operators for Gas (ENTSOG) to monitor security of supply.

The latest ENTSOG Winter Supply outlook found that Europe’s gas infrastructure of storages and distribution systems offers sufficient flexibility to deal with high demand during an extremely cold winter. However, a cold winter would require an increase of gas imports from pipelines or LNG by about 5 per cent to 10 per cent compared with maximum levels seen previously, ENTSOG said. The commission said it was working to find additional supply.

“We’re reaching out to trade partners to discuss if it’s possible to increase their deliveries in the market,” EU energy commissioner Kadri Simson said. Wholesale gas prices are likely to remain high over the winter months and fall from April 2022 onwards, albeit to levels still higher than the average of past years, the commission said.

Alternative market models

Some EU members have questioned whether the wholesale market model is still appropriate. As price spikes are driven by global conditions, the commission found it unlikely that alternative market models would produce a better outcome. However, it has asked the agency of European energy regulators (ACER) to look into the benefits and drawbacks of the current market model, and its implementation by member states. The commission wants ACER to propose recommendations by April next year. The commission outlined measures on Wednesday the EU could use to combat surging energy prices, and said it would explore joint gas purchasing among countries as a way to cushion price spikes.

Record-high electricity and gas prices this year have curtailed industrial production and hiked consumers’ heating bills, prompting 20 EU countries to draw up emergency measures, including energy tax cuts or subsidies for poorer households.

The EU’s executive confirmed those national responses are allowed under the bloc’s law, and mooted co-ordinated responses that would take longer to launch and address future price shocks.

The commission will “explore the potential benefits” of member states jointly buying strategic reserves of gas, it said. Countries’ participation in such a scheme would be voluntary.

Spain has led calls for the EU to launch joint gas purchasing, although other countries are wary of using lasting regulatory changes to tackle a short-term crisis. The commission said gas prices are expected to stabilise at a lower level by April. – Reuters