15% Gas Cut Tests EU Energy Solidarity
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EU’s Energy Solidarity Tested as Agreement on 15% Cut on Gas Consumption Found
On 26 July the Council of the EU reached an agreement on the proposal for a 15% gas demand reduction plan – i.e. 45 billion cubic metres – made on 20 July by the European Commission. The agreement comes days after Gazprom announced a reduction in gas deliveries to the EU via Nord Stream I.
LEX • The political agreement calls for a "voluntary reduction of natural gas this winter" of 15% compared to the average of the last five years, between 1 August 2022 and 31 March 2023. It was also decided to set up an alert mechanism for security of supply — the reduction could thus become mandatory in the event of an emergency.
The twenty-seven Member States agreed to give priority to measures to reduce gas demand which do not affect "protected customers", i.e. households and essential services. The preferred path is therefore to reduce gas consumption in the electricity sector, to nudge companies to switch fuels and to raise consumer awareness.
The alert mechanism would be activated by a vote of the Council of the EU, on a proposal from the Commission, in the event of a significant risk of serious shortages, exceptionally high demand, or if at least five Member States that have implemented their national alert mechanism so request the Commission.
Will these measures make it possible to reach the 15% hoped for? Unlikely, according to Daniel Gros of the Centre for European Policy Studies, who points to their voluntary nature and the maintenance of price cap and other rebate schemes, which have no significant effect on consumption.
None of these measures would achieve any meaningful reduction in gas consumption. The Commission and the Council are clearly avoiding the key issue, namely the need for higher prices, both for consumers and industry. The objection to higher prices is of course that they are politically toxic. But the inconvenient reality is that unless it costs more, few will 'voluntarily' reduce their gas consumption.
DIVISIONS • The Commission's proposal initially set out a 15% goal for all EU Member States. It was opposed by countries such as France, Spain, Italy and Greece, which were not happy with the lack of consideration given to national differences in the energy mix and the lack of interconnectedness between energy networks.
Capacity constraints are significant: it is not easy to send liquefied natural gas (LNG) to the whole continent, and especially to landlocked countries or countries without regasification terminals, which are few in number on the continent. Germany is currently building its first floating LNG terminal, which will certainly not be ready by next winter.
For instance, saving gas in Spain would be a waste, given the lack of pipelines connecting the Iberian Peninsula to the rest of the continent. As a result, gas prices develop quite differently within the EU, with the rise significantly less marked in Spain than in Germany or the Netherlands.
Some also point to the irony of asking Southern Europe, largely a victim of German orthodoxy during the eurozone crisis, to make efforts for an overly Moscow-dependent Berlin, despite the warnings of its Eastern European neighbours and the United States. Germany’s erratic choice to abandon nuclear power is also pointed out.
As Maria Tadeo points out in Bloomberg :
"Germany's reliance on Russia has exposed the flaws of its economic model — high-intensity industry running on cheap gas — and the blindness of its political class to its dependence on the Kremlin. While Berlin is still coming to grips with the shock, Europe's South is growing assertive"
The current situation gives wings to the supporters of a reform of energy pricing, Italy and France in the lead. The price is set at the marginal cost of the last unit produced, regardless of the method used — which is why the price of electricity is linked to the price of gas. Greece recently proposed decoupling the price of natural gas from that of electricity, and received the support of the Spanish Minister for Ecological Transition Teresa Ribera.
DEROGATIONS • The agreement reached by the Council provides exemptions and derogations from the 15% rule, the price for reaching a political agreement.
EU Member States "which are not interconnected with the gas networks of other Member States" are exempt from mandatory gas reductions. These states would be unable to supply the volumes of gas saved to their neighbours due to a lack of infrastructure.
Member States "whose electricity networks are not synchronised with the European electricity system and which are highly dependent on gas for electricity generation" are also exempted. The derogations concern Member States that have exceeded their gas reserve targets and those that are heavily dependent on gas for certain critical industries.
Hungary (alone) voted against the agreement in the Council. The Hungarian Foreign Minister travelled to Moscow on 21 July to request additional gas deliveries to Budapest. Budapest intends to ban gas exports if the situation deteriorates.
RECESSION • Gas prices rose sharply after Gazprom cut gas deliveries via the Nord Stream I pipeline to 20 percent of capacity, citing turbine maintenance issues related to Western sanctions. Gazprom's deliveries are at their lowest level since 2008. The price, revalued upwards, of future gas contracts indicates that the markets anticipate that this momentum will continue for a few more years.
Germany is on everyone's mind. While many EU Member States are less concerned than Berlin with the reduction in Russian deliveries, a recession in Germany will affect the whole bloc, while German industry is already operating as a subsystem. A complete halt to Russian gas supplies would cost Germany €220 billion, according to the Bundesbank and raises fears of long-term effects on the competitiveness of German industry.
The European Central Bank's (ECB) rate hike on July 21 adds to this already gloomy picture — Goldman Sachs and JP Morgan predict that the eurozone will enter recession this year.
What we’ve been reading this week
For the Institut Montaigne, Marc Lazar revisits the relationship between Sergio Mattarella, the seasoned politician, and Mario Draghi, the economist who has never faced voters and yet led Italy for one year, five months and seven days. A ‘technocratic anomaly’ denounced by Tommaso Grossi and Francesco De Angelis, who advocate for Italy to leave behind the habit of giving the keys of the Chigi Palace to unelected experts.
Whoever becomes the next British Prime Minister, substantial improvements to EU-UK relations are unlikely, write Fabian Zuleeg and Emily Fitzpatrick for the EPC. On the dispute over the North Ireland Protocol, the Commission will have to stand firm, and may have to wait for a new election before progress can be made.
Daniel Gros of the CEPS sharply criticises the ‘political agreement’ over a 15% reduction of natural gas consumption across the EU. Let markets do their work so that those who most need gas can be supplied, he argues, and, if necessary, subsidise poorer households to ensure all are heated in winter.
This week’s newsletter is brought to you by Maxence de La Rochère and Thomas Harbor.