Gas will be divided into social packages – Newspaper Kommersant No. 203 (7404) dated 11/01/2022

Germany is preparing to approve €91bn subsidies for 2023 that will allow households to buy up to 80% of their gas needs at a discounted fixed price, and industries up to 70%. The cost of providing such a “price ceiling” for gas will be borne by the state by increasing the public debt. The German approach, which has already drawn criticism from many less wealthy EU allies, including France, looks far more feasible than the pan-European “price ceiling” promoted by the European Commission.

The German government is going on Wednesday to consider the proposals of a special expert group to introduce a ceiling on gas prices for German consumers. The latest version of these proposals was published on October 31 and represents the most feasible plan of measures to curb gas prices that European authorities have been able to work out so far.

Thus, the maximum gas price for households is supposed to be set at €0.12 per kWh (approximately €1.32 per cubic meter, in October the price was €2 per cubic meter) for the period from March 2023 to April 2024. The “preferential” price will cover 80% of the average household consumption in 2021, the rest will have to be purchased at the market price. For industry, the price ceiling will be set at €0.07 per kWh (approximately €770 per 1,000 cubic meters) from January 2023 to April 2024, at this price it will be possible to cover 70% of the enterprise’s basic consumption. Gas recipient companies will be free to sell “preferential gas” at the market price if they wish. This concept creates economic incentives to conserve gas, preserves existing market mechanisms, is relatively easy to administer, and enables consumers to plan their costs.

Nevertheless, industrial enterprises, in order to receive “preferential gas”, must, among other things, give an obligation to maintain existing production in the same place, as well as at least 90% of jobs. Thus, the German authorities intend to fight the relocation of business, especially energy-intensive industries, to countries with cheaper energy resources, such as the United States.

The cost of gas subsidies is estimated at €91 billion. The total amount of subsidies to reduce energy costs, according to Berlin’s plans, will be €200 billion and also includes a reduction in gas tax from 19% to 7% and a number of other measures.

If before the German authorities were going to introduce a special gas tax to finance subsidies, now it is supposed to do this solely by increasing the public debt, which at the end of 2021 amounted to €2.476 trillion (69.3% of GDP). This is a relatively low level for developed countries, however, in fact, this approach shifts the problem of servicing the increased public debt to the next generations of German politicians.

Multibillion-dollar subsidies have already drawn criticism from other EU countries, including France (see below). “Kommersant” dated October 27). At the same time, the German concept of a “price ceiling” for gas, with some shortcomings, looks much more feasible and consistent than the plan proposed by the European Commission (see Fig. “Kommersant” dated October 19). In it, the European Commission is going to limit daily price fluctuations at the main European gas hub TTF to 5%, and also create a separate price benchmark for LNG. In the future, having separated the LNG market from the pipeline gas traded on TTF, the European Commission is apparently going to introduce a price ceiling for TTF, artificially limiting the price there. Unlike the German concept, this plan does not provide economic incentives for saving gas, creates prerequisites for speculation (as TTF prices will break away from price dynamics at other European gas hubs), as well as great uncertainty for market participants and investors.

For example, Michael Fulwood of the Oxford Institute for Energy Studies noted in his October 31 article that imposing an effective price cap on TTFs (both on the exchange price and the OTC market) could lead to massive financial losses and breaches of obligations for hedging trades based on TTF, which, given the annual volume of gas trade in the EU at €6 trillion, is capable of provoking a crisis in the financial market, comparable in scale to the mortgage crisis of 2008-2009. At the same time, Michael Fullwood notes that at the moment the European Commission has excluded the OTC market from the proposed price ceiling, which calls into question the effectiveness of the ceiling itself. In his opinion, “if a ceiling on TTF prices cannot be effectively introduced, then there is no time to waste on such attempts, and if it can, Europe is likely to receive less gas and provoke a global financial crisis.”

Yuri Barsukov