What is the point of putting a limit on the price of gas that will not be implemented?
The restriction may end when gas consumption begins to increase or, conversely, when gas exchanges between Member States decrease or there is a significant decrease in LNG imports in the same period compared to last year. This cover is a bit like flood insurance that stops when it rains heavily.
How did we get here?
If all conditions are met, no trader on the TTF market can accept trades above the threshold that remains active for 20 days. Every day during this period, ACER, which brings together energy regulators, will publish the value of this ceiling on its website, which should not remain constant at 180 euros per MWh. It can go down to €145 per MWh, because €145 per MWh + €35 per MWh is still €180 per MWh. On the other hand, without this 35 euro/mW differential with world markets, there is no longer any limit on the price of gas, but at least we will not be alone in our misery.
The delta of €35 per MWh is justified by the Commission on the density of infrastructure to receive LNG gas from gas terminals (without specifying the origin, Germany, or whether this bottleneck is about to be resolved). Pre-designated agencies are responsible for preparing reports on worldwide gas prices from which the LNG price reference is calculated. It makes sense to take the LNG gas price as a reference: unlike gas pipelines, it is negotiated without delivery location restrictions. The cap of €180 per MWh is significantly lower than the first ceiling proposed by the Commission, but it remains 6 times higher than the average gas prices recorded over the period 2010-2020 (between €5 and €35 per MWh). Therefore, it is not a price control, but a desire to correct a market failure so that price formation no longer simply results from an imbalance between supply and demand.
To justify this, the Commission begins with its observations on the reasons why the price of gas rose to 350 euros per MWh in the summer: the demand for filling gas reserves increased in the winter, at the same time as the gas supply decreased. The commission says that pipeline supplies are complemented by market manipulation and speculation by Russia (why shouldn’t it). Against the background of such an accumulation of unfortunate circumstances, the mechanism of price formation could not be healthy under such circumstances.
Choice of TTF market
The choice of the TTF market, where 80% of Western European gas volume is traded and Russian gas is also sold, is logical to have a good “European” price reference. By April 2022, it was a good indicator of real gas prices, unlike April 2022.
The commission says that circuit breakers will not prevent prices from retracing their route to the peaks in the event of peaks. These are short-term remedies. We also need to be careful that this cap does not violate other rules that reduce our consumption or lead to scarcity, so the pre-cap conditions are so effective that they may never be triggered. The Commission also wants to hedge against changes in forward prices to keep derivatives markets functioning. A cap should not be an excuse for not covering your risks.
Warning from the commission
Cap activation is automatic, which is a good thing, as the decision process takes time and will certainly lead to speculation. ACER will make it clear through the website that the activation conditions are imminent. But the mechanism can be stopped as soon as gas consumption increases by 15% compared to the corresponding month of last year or by 10% in two months. The Commission also warns against attempts to not market gas reserves until the end of the balance. Finally, we should also pay attention to the derivative markets: the mechanism can cause significant losses for players in the derivative markets due to margin calls.
It is risky to activate closed regulation so soon: have we thought of everything? ESMA and ACER, the European financial market supervisory authority, must submit a preliminary report on the results of this regulation on February 23, that is, 7 days before its entry into force, with a final report by March 1. If the cap only has to intervene, it will intervene on February 15.
Germany will therefore capitulate, but time is on its side as bottlenecks will be resolved by 2023 thanks to the installation of several floating LNG terminals.
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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 (OR. en) – Institutional File: 2022/0393(NLE)
