EUROPEAN GAS PRICES LIMITS

PLATTS - 07 Oct 2022 - The European Commission has significant work to do on the design of a gas price cap ahead of the next EU Council on Oct. 20, Irish Prime Minister Micheal Martin said following an informal EU heads of state meeting in Prague Oct. 7.

Gas prices have fallen in recent weeks on the back of slowing storage needs, liquidity support and a drive by the European Commission to intervene to limit energy price increases.

Europe's gas price benchmark, the TTF month-ahead contract, traded Oct. 7 below Eur160/MWh, more than 50% lower than peaks seen in late August.

"Very significant work needs to be done by the European Commission ahead of the next Council" on how to limit gas prices, while proposals to reform the wholesale energy market, delinking gas prices from power prices, could take a further six months, Martin said following the summit.

EC President Ursula von der Leyen said there were three measures being worked on: a "corridor of decent gas prices with our reliable suppliers, with talks underway with Norwegian companies; a limit on the market price of gas, taking out the peaks and speculation at the TTF level; and a partial decoupling of gas prices in the formation of power prices."

This last point was a first step in a far-reaching market reform proposal that would not be ready before the end of the year, she said.

Meanwhile there was broad agreement that by next spring, "it is paramount that we have joint procurement of gas and we avoid out-bidding each other," she said.

"The Single Market is our best asset, we must avoid fragmentation," von der Leyen said.

Fifteen EU member states are reported to back a Europe-wide cap on gas prices, while Poland, Belgium, Italy and Greece have proposed a gas price corridor.

Addressing the European Parliament on Oct. 5, von der Leyen said support was building for a gas price cap but acknowledged there were drawbacks.

"Such a cap on gas prices must be designed properly to ensure security of supply. And it is a temporary solution to cater for the fact that the TTF -- our main price benchmark -- is no longer representative of a market that includes more LNG today," she said.

Longer term, a new EU gas price index would ensure better functioning of the market, with the commission having "kick-started" work on this, she said.

Clear downsides: EFET

The European Federation of Energy Traders warned Oct. 6 that a gas price cap could lead to mandatory rationing.

"The gas price is currently being set by the demand side, not the supply side. Prices rise to a level where consumers self-interrupt, switch to alternative fuels, or invest in other energy saving measures," it said.

Without this signal, consumption would be higher, and any shortfall would have to be resolved via curtailments.

Meanwhile high prices at the Dutch TTF relative to international LNG prices were an indicator of missing interconnections and/or regasification capacity, not a broken market as claimed by von der Leyen.

The price signal should be maintained to incentivize new regasification capacities where these can be delivered quickly, and to resolve bottlenecks, EFET said.

The gas cap assumes companies would be forced to transact at or below the price ceiling, the federation said.

In fact it would put contracted and future deliveries at risk.

"LNG contracts in many cases take place outside EU jurisdiction (and indeed, sellers may insist that future contracts take place in international waters). An importer could redirect cargoes outside Europe rather than trade at a loss against a lower cap. The consequence would be a risk to security of supply," it said.

Commissioner for Energy Kadri Simson is to visit Algeria Oct. 10-11 as part of EU efforts to diversify energy supply away from Russian fossil fuels, the EC said Oct. 7.

The trip includes a bilateral meeting with Algerian energy minister Mohamed Arkab and an EU-Algeria energy business forum.

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