Will Europe be able to limit gas prices
2022.12.19 13:51
Will Europe be able to limit gas prices
Budrigannews.com – After debating for months about whether the measure could hinder rather than assist Europe’s efforts to deal with an energy crisis, countries in the European Union agreed on Monday to cap gas prices.
The goal is to protect businesses and homes in Europe from the kind of rises in gas prices that have occurred since Russia invaded Ukraine. Europe’s inflation has reached its highest level in decades as a result of high energy costs.
Some of the EU’s 27 member states, including Germany, Europe’s largest economy and largest gas user, were divided over the idea because they feared it might make it harder to find supplies on global markets that are fiercely competitive.
The Dutch Title Transfer Facility (TTF) gas hub’s front-month contract, which serves as the European benchmark, would be subject to a price cap if prices exceed 180 euros per megawatt hour for three days, according to a compromise proposal that was agreed upon by energy ministers on Monday.
Russia’s invasion of Ukraine in February resulted in a reduction in gas deliveries to Europe. Around 15 EU nations, including Belgium, Italy, Greece, and Poland, had requested a gas price cap for the entire continent in an effort to lessen the impact of the resulting high prices.
Although the EU agreed to some emergency measures, including obligations to fill gas storage, in recent months, gas prices have decreased, they remain high.
On Monday, the price of the front-month contract on the gas hub operated by the Dutch Title Transfer Facility (TTF) was approximately 107 euros per megawatt hour (MWh).
That contrasts with 14.20 euros/MWh two years ago and 95 euros/MWh last year. In September, the price reached a new all-time high of more than 340 euros per MWh.
Under the arrangement settled on Monday, the cap can be set off beginning from Feb. 15 2023 assuming costs surpass 180 euros each megawatt hour for three days.
The front-month TTF contract must also be 35 eur/MWh higher than a reference price based on three-day price assessments of liquefied natural gas (LNG).
The cap would prevent trades on front-month, three-month, and front-year TTF contracts at prices greater than 35 eur/MWh above the reference LNG price once it was activated. The price at which gas can be traded is effectively capped by this.
Even if the LNG price dropped significantly, the EU price cap would not fall below 178 eur/MWh. However, the EU cap would move along with the LNG reference price, remaining 35 eur/MWh above the LNG price—a system designed to ensure that the bloc can bid above market prices to attract scarce fuel.
The price cap will remain in effect for at least 20 working days after it is activated. If prices fall below 180 eur/MWh for three days, it can be turned off.
All virtual gas trading platforms in the EU will be subject to the cap. Private gas trades outside of energy exchanges, which the Commission has stated are a safety valve for critical deliveries and are unlikely to take over a significant share of trade, will initially not be affected.
The decision to impose a price ceiling has divided EU nations for a long time.
Countries voiced strong opposition to the initial proposal made by the Commission last month, which called for a cap to be triggered when prices reached 275 eur/MWh. Even a record-breaking rise in European gas prices in August would not have triggered the cap under that proposal’s stringent conditions.
In the meantime, Germany, the Netherlands, and Austria have all opposed any cap out of concern that it would move gas cargoes to higher-priced regions and disrupt the energy market in Europe.
An official from the EU told Reuters that Germany ultimately approved the price cap after Berlin won stricter rules to suspend the policy if it has unintended consequences and changes to another EU law on renewable energy permits.
Austria and the Netherlands did not vote. According to EU officials, only Hungary opposed the measure.
Sceptical nations secured safeguards such as the suspension of the cap in the event of a gas supply shortage in the EU, a decrease in TTF trading, an increase in gas consumption, or a significant increase in margin calls made by participants in the gas market.
According to EU energy commissioner Kadri Simson, the policy’s risks outweigh its benefits, and an analysis by EU regulators due in March 2023 may result in the European Commission suspending the cap.
The Intercontinental Exchange (NYSE:), among others, which serves as the host for gas TTF trading has cautioned the Commission against implementing its proposal.
ICE stated that the proposal could cause liquidity providers to stop selling TTF gas futures, which would raise prices, in a memo that was sent to the Commission and seen by Reuters.
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According to the Association of European Energy Exchanges, the EU plan could significantly jeopardize the financial stability of Europe’s energy markets and force utilities to switch to private trading, which is more risky, in order to circumvent the cap.
