EU Gas Price Cap: Just a Waste of Time
Even though the gas price cap is no longer in the news, that doesn’t mean it has gone away. Irina Slav explains why it doesn’t matter right now but might next winter. And that’s probably not the one its creators had in mind, since traders can and have said they will route transactions away from the EU, which could make markets less stable.
By Irina Slav, who has been writing about the oil and gas industry for Oilprice.com for over a decade. First appeared at OilPrice.
Last week, a price cap on natural gas went into effect in the European Union.
After a lot of talk, the EU Commission changed the price cap to 180 euros per megawatt-hour (MWh).
On the EU spot market, natural gas is being sold for about 50 euros, or about $53, per MWh.
Last week, the European Union put a limit on how much natural gas can cost. This was done to prevent a repeat of last year’s huge jump in gas prices, which reached more than $350 per megawatt-hour.
After the Nord Stream pipeline, which was the main way Russian gas got to Europe, was blown up in the summer, prices went up. Businesses closed and people gathered to protest their high electricity bills. And the EU wants this to never happen again.
Getting everyone to agree on a price cap wasn’t easy. It had problems right from the start. Some EU members, especially the wealthier ones like Germany and the Netherlands, were against the idea of putting a cap on the price of a good that sells on a free market with no rules. Others, like Spain, Italy, and the countries in Eastern Europe, defended the cap as a way to keep gas prices low.
The European Commission’s first idea was to cap gas prices at 275 euros per MWh, or $287 if this price stays the same on the spot market for two weeks. Also, the price of gas in Europe had to be at least 58 euros higher than the average price of LNG on the spot market for 10 days in a row during the same two-week period. This would make things even more difficult and unlikely to happen.
Because of how high the original price cap was, how long it had to be in place before the cap mechanism kicked in, and the fact that it had to do with LNG, that first idea was thrown out because it didn’t do much.
The Commission changed it and put the limit at 180 euros per MWh, which is about $197. The cap would go into effect if prices stayed at that level for three days in a row and if that price was 35 euros more than the brand-new EU benchmark price for LNG. Even though the cap mechanism has been officially approved, it is still mostly useless.
On the EU spot market, natural gas is being sold for about 50 euros, or about $53, per MWh. For now, it’s unlikely that this will change so much that the cap will need to be set off. At this time of year, the amount of gas in storage is much higher than usual, so European buyers won’t have to worry about refill season coming too soon.
Carol Ryan of the Wall Street Journal says that a late cold snap could possibly empty these storage sites and push gas prices closer to the cap. But the report says that traders are likely to start acting differently before the TTF benchmark reaches 180 euro per MWh. And the first thing they will do is move their business from the clear and tightly regulated stock market to the less clear over-the-counter trades.
Traders and ICE were quick to point out this as a major worry when they talked about the cap’s level and conditions. Even the European Central Bank said that the cap could make the EU financial system less stable. ICE said that it might be forced to leave the EU.
ICE told Reuters in December, “If agreed, the market correction mechanism will be forced on customers and the market infrastructure, with no time for robust testing and careful risk management.”
“As the market operator, it is ICE’s job to look at all options if this mechanism is agreed upon, including whether it is still possible to have a good market in the Netherlands,” the exchange operator also said.
ICE hasn’t left the EU yet, but just in case, it has set up a TTF market in the UK. For now, it doesn’t seem likely that the conditions needed to trigger the cap will happen any time soon. In theory, this should please everyone. In reality, it’s not quite that simple.
The European Union is coming to the end of winter with a record amount of gas stored. But it bought this gas when prices were many times higher than they are now. It can’t sell that gas because doing so would cost it billions of euros.
In other words, from one point of view, the EU has enough gas to get through any late-winter cold spells, but from another point of view, the EU is stuck with gas it bought when prices were between 100 and 350 euros and is now selling for 50 euros. At some point, buyers will have to start buying again for next winter, and prices are sure to go up, which will add to the cost.
The bad news is already out: Fatih Birol of the International Energy Agency (IEA) recently reaffirmed his pessimistic view of the near-term global energy supply security by saying that competition for LNG is going to get worse as China’s demand rises but supply stays the same. We might still see what needs to happen for the EU gas price cap to go into effect. And it would be interesting to see how many sellers are willing to follow the EU limit.