Rocketing energy prices hit as Europe debates gas price cap

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By William Schomberg and Tassilo Hummel

LONDON/PARIS (Reuters) - Europe felt the chill of soaring energy prices on Monday, with France saying it could not foot all of the extra costs for consumers, while Britain faces a rising risk of recession.

The European Union and Britain are battling to mitigate the shock of what some politicians have dubbed an "energy war" with Russia, which has slashed gas exports to Europe after the West imposed sanctions over its invasion of Ukraine.

The European Commission is set to unveil a package of proposed emergency measures on Wednesday for the 27-nation EU, including a windfall profit levy on energy firms and a life-raft for power firms facing a liquidity crunch.

But countries are split over the details and whether to impose a cap on gas prices, diplomats said.

Meanwhile, Russia said it was hard to predict the consequences for gas transit to Europe of a new arbitration process initiated by Ukraine energy firm Naftogaz.

In France, Finance Minister Bruno Le Maire said consumers would be protected by new caps on energy prices when the current ones run out this winter, but stressed that households would need to absorb a "small part" of the increased costs themselves.

"It would be completely irresponsible to put the burden of these increases solely on the state budget", said Le Maire, adding there will be a "contained rise in gas and power prices."

In Britain, where inflation has hit a 40-year high of more than 10%, the economy expanded by 0.2% in July compared to June, less than the 0.4% expected. The sharp climb in energy costs hurt demand for electricity and a leap in the cost of materials hit the construction sector.

A "disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession," said Paul Dales at Capital Economics.

Meanwhile, as the European Commission drafts the next series of EU measures, Norway warned it against gas caps.

'TOO LITTLE GAS'

"We're going into the talks with an open mind but are sceptical towards a maximum price on natural gas," Norwegian Prime Minister Jonas Gahr Stoere said on Monday after a call with European Commission President Ursula von der Leyen.

"A maximum price would not solve the fundamental problem, which is that there is too little gas in Europe," he said.

Norway, which is a close ally of the EU, has become the bloc's largest supplier of gas after Russia cut back exports in the wake of the Ukraine war, giving it record income from its petroleum industry as prices soared.

While Norway aims to be a reliable supplier of gas to Europe, the Nordic country has said the terms of trade should be determined by negotiations between companies that pump the hydrocarbons and the firms that buy it.

In a bid to lower soaring energy bills for citizens and businesses ahead of winter, the bloc's energy ministers on Friday asked the European Commission to include a gas price cap.

But countries disagree both on whether such a cap is needed and what form it should take, diplomats said, with options ranging from a price cap on all imported gas, pipeline flows, wholesale gas trading, or supplies from Russia.

The EU's 27 member states will need to approve the energy measures, possibly at another emergency meeting this month.

'UNPREDICTABLE'

EU ministers ultimately backed away on Friday from a price cap targeting only Russian gas, which countries including Hungary and Austria had warned could see Moscow cut off the dwindling supplies it still sends west.

Russia supplied around 40% of the EU's gas before its invasion of Ukraine. That share has plummeted to 9%, as Moscow has cut supplies, blaming technical issues caused by sanctions.

Naftogaz said on Friday it had initiated a new arbitration proceeding against Gazprom (MCX:GAZP), saying the Russian firm had not paid it for gas transportation through Ukraine on time or in full.

"There could be a lot of unpredictable things from both our Western colleagues and the leaders of Ukraine's gas industry," Kremlin spokesman Dmitry Peskov said.

Natural gas flows from Russia to Europe along key routes were steady on Monday morning, while the Nord Stream 1 pipeline remained shut.