EU shelves plans for a price cap on Russian gas

The EU has rejected plans for a price cap on Russian gas, instead opting for a windfall tax on oil and gas companies, alongside market reforms to decouple gas prices from wholesale energy costs

The issue of gas prices dictating wholesale costs has not gone unnoticed by the European Commission, and President Ursula von der Leyen has said that the bloc would conduct a “deep and comprehensive reform” to decouple the cost of gas from the price of electricity:

According to a statement released by the EU Commission, a cap of €180 (£155.34) per megawatt hour could be placed on the electricity produced by renewable energy firms. For comparison, Europe’s benchmark wholesale gas price is currently €212 (£182.96) per megawatt hour. Further measures in the EU’s package to help households in the region include a “crisis contribution” from oil, gas, and coal producers, alongside mandatory targets for countries to cut electricity consumption during peak hours as the EU attempts to stave off energy shortages.

Rising energy costs are already impacting industrial sectors across the Eurozone, with the Financial Times reporting that industrial groups in the region suffered their biggest monthly fall in production for more than two years in July.

Driven by surging energy prices and supply chain bottlenecks, the region is seeing its growth prospects hampered as recession looms. In fact, factory output in the 19 countries that share the euro dropped 2.3% in July from the previous month, the largest fall since the start of the pandemic in April 2020. Further, it was a larger decline than the 1% decrease expected by economists, who themselves expect the higher cost of energy to continue to hit manufacturing and consumer spending in the coming months.

Rory Fennessy, an economist at Oxford Economics, said:

The concerns follow similar sentiment in the UK, where manufacturers association Make UKs recent survey of its members found almost half (42%) of respondents saying their electricity bills had doubled in the last 12 months, and that just under sixty per cent said increased energy costs are now business threatening.

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