Gas price cap six times higher than pre-crisis price… This is nothing more than price control

How did we get here?

Is the commission’s goal to limit the price of gas or to limit its volatility? He begins with his observations at the height of spikes in gas prices: increased demand to fill winter stockpiles, declining pipeline supplies, Russian manipulation and speculation, and a gas price structure that really didn’t expect such a spike. from running out of gas. Between 2010 and 2020, gas prices only varied between 5-35 EUR/MW. In August 2022, we reached 350 EUR/MW. For the commission, all the factors driving this summer’s 2022 prices will continue in light of next winter. The TTF market is the most representative of natural gas prices for Northwest Europe. It was this market that handled Russian gas and 80% of gas for the European Union. This was a good indicator of “real” gas prices until April 2022, when prices diverge. The issue, according to the Commission: infrastructure bottlenecks for LNG carriers and gas pipelines that do not represent an imbalance between supply and demand.

The commission says that circuit breakers that are supposed to work are only short-term tools. They then do not prevent prices from continuing their journey to the tops. If there is to be a mechanism to limit excessive prices, it cannot force the European Union to increase its consumption, while other regulation aims to reduce it, by imposing a ceiling on the price of gas in the TTF market, the Commission is above all a message to the rest of the world that Europe has already adopted a suspended price-setting mechanism. is not willing to do, but only the prices resulting from the balance between supply and demand.

How will this work?

However, the mechanism is complex: if the price exceeds the limit of 180 Euro/MW and is 35 Euro/MW higher than the average price on world LNG markets, the operators in the TTF market can no longer accept transactions beyond this increased limit. ACER (Agency for the Cooperation of Energy Regulators), which brings together the energy regulators of the Member States, will publish the value of this ceiling when necessary. Once activated, the cap remains active for 20 days, during which time the dynamic cap will remain at 180 (145+35) EUR/MWh if the price falls below 145 EUR/MWh. The combination of the two conditions creates a squeal, because if the 35 EUR/MWh differential is not reached, the price of gas can increase without limit, but it is the whole world that is affected (small consolation).

The proposal of the European Commission to limit gas prices was not convincing. But could it be him?

The Commission proposed a differential of 35 EUR/MW because, according to it, this is an additional cost due to bottlenecks in the reception of LNG liquefied gas and its transport from LNG terminals (without specifying the main culprit: Germany). The benchmark for gas prices will be world prices for LNG, as it is sold without delivery location restrictions, unlike gas pipelines. Pre-selected institutions will be responsible for reporting the prices. Although lower than the first proposal, the threshold of 180 EUR/MWh remains relatively high. The Commission justifies this by wanting to correct an apparent market dysfunction. Not price control, they say. The Commission also wants derivatives markets to hedge against changes in forward prices and continue to operate. A cap should not be an excuse for not covering your risks.

The Commission offers the option to stop the mechanism, which automatically turns on and off if it does not intervene. ACER shall inform through its website that the conditions for the activation of the mechanism have been fulfilled. If gas consumption increases by 15% in one month or 10% in two months, this mechanism can be stopped. And thus, the mechanism can also be stopped if a voltage is sensed in the supply. The Commission will be careful not to attempt to put more gas volumes on the market until the cap mechanism is lifted. Therefore, it is not tomorrow that natural gas will be replaced by coal, which emits more CO2 for electricity generation! Similarly, if derivatives markets are violated by this mechanism, it will also be stopped. When this mechanism is triggered, it can still create significant losses for players in derivatives markets, especially in terms of margin calls.

The Commission wants to go fast, but is afraid: it is asking ESMA (the financial market regulator) and ACER to analyze the consequences of such a speed of market placement. Their report should arrive by March 1, 2023, along with the preliminary report by January 23, that is, 7 days before the entry into force of this mechanism.

“If we do what is necessary, we can get out of the crisis in less than 5 years… But gas will remain expensive”

Germany will therefore accept this “dynamic” price cap arrangement, but it has played for itself: the bottlenecks are about to be resolved thanks to the construction of several terminals handling LNG carriers in record time in the Baltic States. therefore, a differential of 35 EUR/MWh should never be encountered.

-> To know more: Proposal for a COUNCIL REGULATION Establishing a market correction mechanism to protect citizens and the economy from excessively high prices, Brussels, 19 December 2022.