From the Editor: Gas price cap would endanger investment [Gas in Transition]
Moves to cap the price of European gas imports are gaining ground, despite the likelihood that it would result in a total cessation of Russian gas supplies.
Since Gazprom failed to reopen the Nord Stream I pipeline, citing a leak in a turbine as the cause, Europe is not receiving a lot of Russian gas anyway. According to the Brussels-based think tank Bruegel, imports of Russian gas to Europe had dropped in week 35 (August 28-September 03) to just 659.2mn m3. This is a quarter of the 2,620.7mn m3 being supplied in March, just after the start of Russia’s invasion of Ukraine.
However, that gas, much smaller in volume than it once was, is still needed. From this perspective, a gas price cap is shutting the door after the horse has bolted. If Russian gas imports to Europe sank to zero, it would only worsen the fundamental supply situation.
Financing Russia’s war effort
That Europe, by buying Russian gas, is financially supporting Moscow’s war effort is hard to reconcile with the sending of arms and other support to Ukraine. It makes little sense.
Seeking to end Russian oil imports does little to hurt Moscow financially as oil can be relatively easily diverted to other markets. The impact is a change in trade flows, which causes problems for refineries, rather than making a significant dent in Moscow’s bank account.
In contrast, and with the exception of LNG, Russia’s gas cannot simply be re-routed to other markets because the pipelines or excess liquefaction capacity does not exist. Reducing Russian gas imports does therefore hit Moscow in the pocket.
But the cost is high. Europe imported 167bn m3 of gas from Russia last year by pipeline, 132.3bn m3 of which went to the EU, representing a third of the bloc’s gas consumption.
The fact is that the desire to cap gas prices is being driven just as much by the impact of high gas and electricity prices on European consumers as it is concern about Russia’s oil and gas revenues.
Russian imports or all gas imports?
The idea of a gas price cap for all European gas imports has been floated, understandably resulting in resistance from gas suppliers, such as Norway, which have stepped up their efforts to bring more gas into European markets during the current crisis.
Norway, which has only one LNG plant, depends on its export pipelines and would be at the mercy of a near monopoly, if the EU decided to impose a gas price cap, particularly if the UK introduced a similar measure. In contrast, Algeria has spare LNG capacity and could increase its use to the detriment of pipeline exports to Italy and Spain.
An exercise in buying power would shift the economic costs on to the suppliers Europe needs most. Europe needs these countries in coming years to invest upstream to expand gas supplies. This is a crisis which will not simply end next Spring, if Europe survives the coming winter.
However, no decision has been made on how the price cap might work and what imports it would be applied to. European utilities would have to continue paying market prices to attract LNG to Europe’s shores. Where will the funds come from to bridge the gap?
One apparently popular answer appears to be low-cost electricity generators – renewables and nuclear – who are benefitting from the sky-high wholesale electricity prices generated by a marginal pricing system in which gas is the marginal fuel.
However, it should be noted, first, that not all renewable energy generators are receiving market prices and, second, imposing windfall taxes on them undermines the business case for more renewable energy capacity. This is one of the primary pillars of the REPowerEU plan – a massive expansion of renewable generating capacity, increased non-Russian gas supplies and energy efficiency -- which will eventually deliver Europe with energy independence from Russia.
Failing markets?
High gas and electricity prices are been presented as a market failure. However, the market is acting as it should, providing large incentives for both upstream gas investment and in new non-gas generation capacity. The problem is that the supply-side shock is both sudden and extreme and, while market prices react sharply to provide the right signals, investment in infrastructure takes time. The dislocation in timing creates a crisis.
Markets, of course, are never perfect. Most notably, they fail to price environmental impacts and they fail to price adequately the value of supply security. Much of the last two decades have been spent attempting to address the former, while the vulnerabilities of the latter gained insufficient attention. Those chickens have come home to roost in a much more sudden and dramatic way than most people anticipated, although there were many market observers who warned of the dangers of Europe’s over-weaning dependence on Russian gas.
The sense of false security was based on the mutual benefits of European-Russian gas trade and a huge underestimation of the dangers inherent in Russia’s lack of democracy. This allowed the concentration of power in one person’s hands, combined with a resurgence of imperial and irredentist ideology. It seems some lessons we just refuse to learn.
Extreme situations call for extreme responses
There is no question that the situation is extreme, and that extreme policy responses may be necessary. Ten of millions of European consumers are falling into energy poverty and they need help. At the same time, the independence of a sovereign nation is at stake in the very heart of Europe, which, should it fall, would have huge security implications for the continent.
But the policy responses employed should not damage the mechanisms acting to resolve the crisis over the medium to longer term. In the first instance, every demand-side energy conservation measure possible should be taken. Every attempt to increase gas imports to Europe should be supported. A price cap does not change the supply/demand balance; these measures do.
Moreover, any large-scale interventions which threaten investment should be approached with extreme caution. They should be proportionate and temporary. They should be properly funded. And, above all, they should not endanger the economic sectors which will ultimately deliver both European energy independence and the energy transition.