(Bloomberg) -- Europe’s biggest energy producers and traders warned the European Commission against introducing a gas price cap as a tool during times of crisis, after some officials raised the idea in recent months.
The idea of a cap is opposed by most member states, according to people familiar with the matter, and the industry raised its concerns as the European Union’s executive arm prepares to unveil a plan on Feb. 26 to boost industrial competitiveness and ensure affordable energy. Gas prices have more than doubled in the past 12 months and soared to a two-year high this week amid concerns about depleting storage.
The idea of a price cap was raised previously by former European Central Bank President Mario Draghi in his report last year on competitiveness. It has been flagged by certain officials as as a potential measure in a toolbox that could be used in the event of a crisis, said the people, who asked not to be identified commenting on private talks.
The industry’s opposition was conveyed in a letter addressed to Commission President Ursula von der Leyen and signed by 11 associations, including oil and gas producers, energy traders, clearing houses and energy exchanges.
“We believe this measure, if announced, could have far-reaching negative consequences for the stability of European energy markets and the security of supply across the continent,” they wrote. “A price cap does not decrease the global market price of energy, but may create upward price pressure and increased price volatility in Europe,” the letter said.
Energy prices have dropped significantly from the peak during the energy crisis but still remain stubbornly high. Von der Leyen has set lowering energy prices and boosting industrial competitiveness as a political priority for the commission during her second term in office.
European gas prices have soared as a colder winter combines with lower volumes from Russia to deplete inventories at the fastest pace in years. The prospect of increased demand this year to refill reserves during warmer months means prices for spring and summer gas have surged to an unusual premium over next winter.
The rally has reignited the anxiety around higher energy prices that was first unleashed in the aftermath of Russia’s invasion of Ukraine.
In last year’s report, Draghi had proposed limiting the possibility for speculation and recommended that following the US example, EU regulators should be able to apply financial position limits and “dynamic caps” if spot or derivatives prices in the region diverge markedly from global prices.
Joining the chorus of critics was Eurelectric, the region’s association for the power industry, which called on the commission “to avoid ill-designed short-term measures” that were suggested in Draghi’s report.
“Of all the ideas that have circulated to achieve more affordable energy, the inframarginal price cap is probably the worst,” said Kristian Ruby, Eurelectric’s Secretary General. “It is inefficient, impossible to implement and detrimental for the confidence of investors.”
The concept of a price cap isn’t new to Europe.
During the energy crisis, the EU implemented a price cap that would have been triggered if prices exceeded €180 per megawatt-hour for three working days and if it was at least €35 per megawatt-hour higher than prices on the global market. It was never triggered and expired at the end of last month.
Spain and Portugal had imposed a temporary price cap on gas used for electricity generation after getting an exemption from EU energy market rules.
The EU is trying to lower energy costs as part of its effort to keep pace with the US and Chinese economies during the transition to a cleaner economy, yet it is constrained with what it can do in the short term. It is also locked in a race to secure energy supplies, and finding the right balance between low prices and ensuring enough gas, will be a tough balance to strike.
