EU Commission said gas price cap impossible as requested -sources

By Gabriela Baczynska

BRUSSELS (Reuters) -The European Union's executive body told its 27 member countries at a seminar on Monday that it was not possible to create a gas price cap that would not affect long-term contracts or supply security, two diplomatic sources told Reuters.

After much wrangling at an all-night summit, EU leaders agreed last month to task the European Commission with proposing a temporary gas price cap in power generation and a temporary price corridor to bring down costs for consumers.

But a compromise between those like France, Spain and Belgium that want a cap and the German-led camp opposing it meant additional conditions were attached, namely that any cap could not affect long-term contracts, lead to an increase in gas consumption or provoke producers to reroute supplies elsewhere.

"Now, the Commission has said it's impossible to have a cap that meets these criteria," said one of the diplomats, adding that national envoys of the 27 EU member countries to the bloc's hub, Brussels, would discuss that next on Friday.

"There will be a lot of emotions flying high," the diplomat said.

The matter has divided EU countries for months as they look to address an acute energy crunch that is driving record-high inflation and threatening recession in the bloc.

The stubborn opposition of Germany and the bloc's powerful executive body in Brussels has upset those seeking a cap, as well as the chairman of EU leaders, Charles Michel, who wrote a letter to the commission's head, Ursula von der Leyen.

"The prompt delivery of concrete results to our citizens and businesses should remain our utmost priority," Michel wrote, telling von der Leyen to come forward with the necessary legal proposals "as soon as possible," according to the letter, dated Nov. 7 and seen by Reuters on Tuesday.

TUG OF WAR

Instead of a cap, the commission on Monday offered a voluntary "market correction mechanism" that did not go far enough for countries demanding a cap to instantly limit price spikes, said the second diplomat.

The diplomats spoke under condition of anonymity and did not provide details on how exactly the mechanism would work.

Both sources said as many as 15 countries demanding a cap threatened to block other elements of the leaders' October energy deal, which also includes launching joint purchases and working out a new price benchmark, for as long as the commission does not present a solid cap proposal.

"It was very frustrating," said the second diplomat. "Germany and the Netherlands got a lot of concessions to water the cap down, but the idea of having a cap was still there in the EU leaders' summit decision."

While the market correction mechanism idea fell below the expectations of those wanting to intervene decisively in market prices, it drew a warning from Europex, the association of European energy exchanges.

"We are concerned that the mechanism...will lead to a deterioration of security of supply and risks to financial stability," Europex said in a statement.

After what is expected to be a heated Friday meeting of the national ambassadors to the EU in Brussels, the bloc's energy ministers are due to discuss the issue on Nov. 24.

Should a deal on a gas cap remain elusive, the subject would go back to the very top, with the next summit of EU leaders due on Dec. 15-16.

(Reporting by Gabriela Baczynska; Editing by Jan Harvey, Lisa Shumaker, Josie Kao and Leslie Adler)