Explained | Europe’s much-debated plan to cap gas prices

European Commissioner for Power Kadri Simson. File
| Picture Credit score: AP

The European Fee on November 23 proposed introducing a gasoline worth cap for a 12 months from January 1 at 275 euros a megawatt hour (MWh) EU vitality commissioner, Kadri Simson mentioned.

The Fee hopes the ceiling will assist member states curb vitality costs for houses and enterprise which have reached file highs this 12 months following Russia’s invasion of Ukraine, resulting in inflation and a value of dwelling squeeze.

Additionally Learn | Europe to be hit hardest in global slowdown, says OECD

The proposals will likely be debated by vitality ministers from the bloc’s 27 member international locations on November 24.

Do all international locations agree?

The worth cap concept has led to persistent disagreements between the EU’s 27 member states.

Belgium, Greece, Italy and Poland are among the many international locations most vocal in calling for a gasoline worth cap to be applied, whereas the bloc’s largest economic system Germany has led the opposition.

Germany has mentioned a cap may make it tougher to draw a lot wanted gasoline provide and scale back the motivation to curb gasoline consumption when international locations want to avoid wasting gas and exchange Russian deliveries.

How would the cap work?

The European Fee, the EU government, has proposed making use of the cap to month-ahead derivatives on the Title Switch Facility (TTF), the Netherlands-based gasoline alternate that serves as Europe’s worth benchmark.

It could kick in if the front-month TTF settlement worth exceeds 275 euros/MWh for 2 weeks and if TTF costs are 58 euros greater than a Liquefied Pure Fuel (LNG) reference worth for 10 consecutive buying and selling days inside the two weeks, Fee paperwork confirmed.

If these situations are met any trades above the cap stage wouldn’t be accepted.

It could not have an effect on over-the-counter (OTC) commerce, which the Fee mentioned was a security valve for crucial deliveries whereas being unlikely to take over any main share of commerce.

The ministers on Thursday will debate the formulation of the cap, the ceiling stage, in addition to the scale of the hole between the TTF worth and world LNG costs.

What does the market assume?

The Affiliation of European Power Exchanges (Europex) has written to the Fee saying the plan may pose a serious threat to monetary stability and provide in Europe’s vitality markets.

Europex mentioned the cap may result in utilities stopping ahead shopping for and promoting, referred to as hedging, of their gasoline manufacturing and consumption and make them transfer to extra OTC buying and selling, not topic to the cap, which it mentioned may enhance counterparty dangers.

Europex additionally mentioned the cap may make it tougher for utilities to draw LNG deliveries.

Some merchants have mentioned it may scale back the liquidity of front-month trades and result in a rise in buying and selling in different merchandise such because the day-ahead contract.

The Fee’s Ms. Simson mentioned the mechanism is fastidiously designed to be efficient, whereas not jeopardising safety of provide, the functioning of EU vitality markets and monetary stability.

Will the cap decrease costs?

Ms. Simson, when saying the proposal mentioned there was no silver bullet to chop costs.

The Entrance-month Dutch TTF contract is buying and selling round 120 euros/MWh, however has reached intraday highs over 340 euros/MWh this 12 months.

The 275 euros stage is a better cap than some had anticipated, with one EU diplomat beforehand suggesting a 150-180 euros/MWh vary.

New gasoline worth benchmark

Whereas the value cap is designed to be a short lived repair, the Fee desires a extra lasting various worth benchmark for gasoline in Europe, and has requested EU vitality regulators to launch one by March 31, 2023.

Traditionally, the gasoline worth on the TTF hub has been used as a benchmark for LNG deliveries into Europe. However the main discount of Russian gasoline provides this 12 months has made the TTF worth extraordinarily risky, and sometimes dearer than LNG costs in different areas.

Brussels says a brand new index is required for the reason that TTF is guided by pipeline provide and not represents a market that features extra LNG.

Some trade sources have advised trade ought to develop a brand new benchmark by itself. Its success would rely on whether or not the gasoline trade makes use of it.

Value cap on Russian gasoline

The Fee advised a Russian gasoline worth cap in September, however dropped the concept after resistance from central and jap European international locations anxious Moscow would retaliate by chopping off the gasoline it nonetheless sends to them.

Additionally Learn | Data | How much of Europe’s gas comes from Russia?

Europe relied on Russia for roughly 40% of its gasoline earlier than Moscow invaded Ukraine. That share has dropped to round 8% as Russia has minimize provides to Europe.

Provided that fall, some EU diplomats mentioned a worth cap would do little to scale back European gasoline costs, and would operate as extra of a geopolitical transfer to chop revenues to Moscow.

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