Monday, June 5, 2023

This is how gas price caps work in Europe

First LNG tanker to be unloaded at Wilhelmshaven floating regasification plant, the first in Germany.Poole (Reuters)

Europe wants at all costs to avoid a repeat of last summer’s episode, when the price of natural gas soared above 350 euros per megawatt hour (MWh), breaking any factional patterns. With that aim between their eyebrows, and after several weeks marked by divergence of positions between the capitals – with the south and periphery having much higher ambitions than the center and north – twenty-seven agreed a border on Monday The price of gas in the European Wholesale Market (Dutch TTF) which promises to eliminate speculation and reduce future pressure on households and companies.

How will it work?

When the price of natural gas in the TTF market exceeds EUR 180 per MWh for three consecutive days and the reference price of this fuel increases by EUR 35 or more in the rest of the world’s major markets, the cap will jump . From that moment on, the maximum price to be paid will be the price of that global basket plus 35 Euros. With this premium, it is a question of preventing suppliers from preferring to sell in other latitudes rather than in European countries, which is one of the great fears of Germany and the Netherlands.

In the opposite direction, the cap would be deactivated when—for three days in a row—gas falls below 145 euros per MW: 180 euros cap, minus 35 differential. There would also be other factors that could lead to its deactivation: the declaration of a gas emergency on a European or regional scale, that the guarantees of gas companies skyrocket and destabilize the financial markets, or that gas demand registers an increase. Is. Suddenly, among others.

Why on the Dutch market?

Because it is, by far, the most important on the continent and in some form to which all the others refer. Therefore, by imposing a limit on this reference, the price in the rest of European gas markets – among them, the Spanish MiGas – is also indirectly limited. In any case, if this does not happen, the European Commission has a trick up its sleeve: the possibility of extending the scope of the mechanism to all others.

When will it be active?

From next 15 February. Today, however, the market is far from the trigger value: this Monday it closed at 107 euros, down almost 70%. What happened this year – in which the price of gas has increased fivefold – on the other hand, is a sign of huge volatility and if gas demand in Asia is long enough then this capacity addition can by no means be ruled out. . , the main player in the market- re-emerging.

If it were to happen in 2022, according to Bloomberg’s calculations, the cap would have been active for 40 days in August and September.

What would be the implications of this?

very. First, it should cut potential price increases for households and companies in their tracks. And, therefore, it should also attenuate the energetic part of inflation.

On paper, this will have an impact on electricity prices as well. the reason? Except in Spain and Portugal—where the so-called Iberian system has separated gas and electricity since June 15—the fuel continues to mark up the price in hours in which renewables and nuclear do not occur. able to cover a large part of the demand. And if there is a ceiling of gas, then in a way there will be a ceiling of electricity when there are spikes of gas. “At peak times in the gas market, the transition to electricity will be put on hold,” said Alejandro Labanda, director of ecological transition at Baybartlet Consultancy. The best example, he says, is what happened last summer, when most of the gas was immediately transferred to European electricity markets.

Teresa Ribera, Minister of Ecological Transition.Photo: Getty Images

Is there a risk of deficiency?

This was one of Germany’s main fears, but it is unlikely to happen. With the aforementioned premium of 35 euros per MWh, gas suppliers would continue to have an incentive to sell to Europe rather than the rest of the world. If that doesn’t happen – something unlikely – this Monday’s agreement envisages deactivating the cap if there is a sudden drop in liquefied natural gas (LNG, in the sector’s jargon, that comes by ship) arrivals. ), which puts the security of supply at risk. The European regulator, ACER, will be essential in this process: it will be in charge of “constant monitoring” of the gas market and will deactivate any threats if it is detected.

“In the face of any risk to the security of supply, the ceiling will jump,” summarizes Labanda. Countries in the south and the periphery have won the battle around the reference price (180 euros is a light year from the 275 euros initially proposed by Brussels). But Germany guarantees that if there is even the slightest doubt, supply concerns will take precedence over price.

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