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Gas and electricity prices are soaring so high in Europe that policymakers want to artificially sever their link

Markets Insider 8/30/2022 (Phil Rosen)
European Commission President Ursula von der Leyen. Sean Gallup/Getty Images © Sean Gallup/Getty Images European Commission President Ursula von der Leyen. Sean Gallup/Getty Images
  • The European Union wants to artificially sever the tie between natural gas and electricity prices.
  • Policymakers aim to step in and "ensure that the gas price will no longer dominate the electricity price," European Commission President Ursula von der Leyen said. 
  • Power prices have soared almost 10-fold over the past year and inflation continues to climb. 

With natural gas and electricity prices soaring to record highs, European Union policymakers aim to step in and artificially decouple the two costs, according to European Commission President Ursula von der Leyen. 

She did not explain specifics, though the bloc will move to limit prices in the short term and then over time cut the link between gas and electricity, according to Bloomberg.

"We will have to develop an instrument, that will happen in the next days and weeks, which ensures that the gas price will no longer dominate the electricity price," von der Leyen said Monday. 

Dutch TTF futures, the European benchmark for natural gas, slipped Monday to 268 euros per megawatt hour after hitting a record 340 euros last week. Prices remain more than 1,000% higher than a year ago. 

Electricity prices have mirrored those gains, with German baseload power, the benchmark price for Europe, trading at more than 1,400% above its average from 2010 to 2020. 

"Skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design," von der Leyen said earlier Monday. "It was developed under completely different circumstances and completely different purposes."

One potential to stem ballooning prices would be to cap prices on European gas exchanges, according to Bloomberg, however a similar lever could be introduced at various points in the gas value chain. 

Another idea that's been floated is for a short-term tax on excessive profits earned by the energy industry. 

"We will look very carefully at what instruments we have that we can use to bring down electricity prices," Germany Chancellor Olaf Scholz said at bilateral talks in Prague on Monday. "It's not something that can happen at random, it has to work in a technical sense, but obviously what is being set now as the market price is not a real reflection of supply and demand. 

Policymakers have already been racing to fill up key gas storage ahead of winter months, and remain on pace to hit their storage target of 80% by November 1.

At the same time, Russia is set to shutter the Nord Stream 1 pipeline this week, which had already slashed flows to 20% capacity. Gazprom's planned three-day maintenance has sparked fears that further gas cuts could loom, which would put Europe in an even worse position and could add further pressure to prices.

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