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A ‘6-point plan’ to save Europe’s gas market

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Kyriakos Mitsotakis is the prime minister of Greece. 

ATHENS — The war unfolding in Ukraine has already driven more than 2 million people from their homes, destroyed countless lives and livelihoods and inflicted death, misery and human suffering on an unimaginable scale. 

So far, the international community’s focus has rightly been on the defense of Ukraine’s sovereignty and democracy, and providing military and humanitarian support for its struggle and help for refugees. These are issues on which we will not relent. Just as we will continue to tighten the economic grip on Russia’s regime with the imposition of sanctions. 

There is, however, another important, more subtle but crucial facet to this crisis that requires our attention: Europe’s vulnerability when it comes to gas prices and electricity produced by gas.  

In normal times, the market economics of supply and demand determine the price of any asset. But these are not normal times, and natural gas has become a major factor in the power struggle between Russia and the European Union. In other words, the EU’s gas wholesale market hasn’t been functioning normally for some time now. And I believe this must be addressed swiftly and decisively to prevent further damage to EU citizens’ lives, member countries’ economies and the success of the European Green Deal. 

Analysis by the EU Agency for the Cooperation of Energy Regulators (ACER) and the EC Gas Coordination Group show that gas prices have decoupled from market economics, and are instead following the impulses of fear and speculation. Messages regarding the supply of natural gas lead to grossly amplified market reactions that result in outlandish prices, which do not reflect the reality of gas reserves — or supply and demand within the union.  

The consequence of this is a huge additional burden on citizens, who are left paying much more than they should for gas to heat their homes and for electricity produced by gas. On top of this, energy prices also impact significantly on inflation within the eurozone, making life more costly for everyone. 

This spiral of speculation and politicized price hikes must stop. When markets cease to function normally, it is the obligation of governments and regulators to step in and ensure the market can reset and rebalance. Now is such a time. 

That is why I have written to European Commission President Ursula von der Leyen, asking the Commission to consider a “Six-Point Plan” I drafted for the EU to regulate the gas wholesale market. 

Extreme circumstances call for out-of-the-box thinking, and the time has come to address this threat head on. We are seeking to intervene only as a last resort and with a temporary set of measures. The following is a set of technical but necessary steps to rebalance the markets. 

First, we need a price cap on what are known as title transfer facility (TTF) prices, or the highest historic gas prices before the crisis. Second, we must have daily price guardrails, similar to those that exist in equity markets.This will allow us to limit volatility on the fluctuation band on TTF, within, for example, plus or minus 10 percent.

We should also consider emergency price setting — in other words, fixed-price setting — but only as an emergency reaction to declarations regarding pipeline gas flows from Russia. We also need a profit cap on gross profit margins. In wholesale electricity markets, for instance, this could be a 5 percent cap based on market regulators monitoring production costs and production assets. 

Then, there’s physical-delivery trading, or the consideration of a time-limited option in which to only allow trading with physical delivery and avoid market manipulation.  

And finally, there’s liquidity enhancement: Increasing liquidity in the natural gas market by market-coupling between the United States, the EU and Asia. For example, this could be done by enhancing cooperation with China on LNG cargoes, and potentially introducing caps on transportation costs to disincentivize speculation. 

I understand that these points represent considerable market interventions. That is why they must be time-limited and accompanied by clearly defined triggers and exit options. They are designed to give the EU a short-term reprieve to stabilize the gas market, stop market speculation at the expense of taxpayers and businesses, disarm the “weaponization” of the gas market due to geopolitical tension, and find the time for more sustainable mid-to long-term solutions.  

Furthermore, these are measures that have already been used in other markets, under extreme circumstances in the past. And more importantly, they can rationalize the prices without putting extra fiscal costs on our economies, or affecting the production capacity or supply chains of natural gas.  

But we must act now. This problem will not simply go away as soon as demand for heating gas subsides. As we move into the spring and summer months, it will persist on electricity prices, which are linked with gas prices in the wholesale markets, putting an enormous burden on households and businesses.  

This plan is designed to protect the functioning of Europe’s gas and electricity wholesale markets and ensure that the EU, its citizens and its member countries’ economies do not unduly suffer in an already challenging period. Without it, the risk to stability across the bloc will only grow. 

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