The European Union’s executive is designing an emergency natural gas price cap in an effort to avoid the kind of record highs seen in August without risking the security of supplies to the region.
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(Bloomberg) — The European Union’s executive is designing an emergency natural gas price cap in an effort to avoid the kind of record highs seen in August without risking the security of supplies to the region.
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The European Commission is due to discuss the final shape of its so-called market correction mechanism at a meeting on Tuesday in Strasbourg. In a regulation to be proposed to member states, it plans to say that price spikes involve tangible damages and risks for customers, suppliers and security of supply in gas and electricity markets, according to a draft seen by Bloomberg News.
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“With the current low levels of Russian natural gas flows to Europe, already reduced to 9% of the EU total gas pipeline imports, and the perspective that they will not rise to pre-war levels, the situation on gas and financial markets remains challenging in the EU,” the commission said in the document. “The unprecedented change of gas supply and transport routes, combined with market and price formation instruments that were not tailored to a situation of a supply shock, exposes European consumers and business to a manifest risk of further potential episodes of economically damaging gas price spikes.”
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European natural gas prices surged as buyers sought to offset supplies from Russia, which had been the region’s biggest source of the fuel until it limited flows after Europe’s condemnation of its invasion of Ukraine. While futures on the Dutch Title Transfer Facility, the EU’s biggest trading hub, have dropped from an all-time high in August, they are still more than double the five-year average.
“The objective of the instrument is to smoothen events of very excessive prices but not change structurally the level of prices,” the commission said in the draft. “The events in August 2022 can serve as a benchmark to determine the level of the intervention.”
Commissioners aim to agree on the exact level of the price cap and its activation factors when they meet on Tuesday.
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The mechanism will include a fixed ceiling to be regularly reviewed and activated when two conditions are met. The first is the increase of the month-ahead TTF above a certain level and the second would be a certain spread between the spot TTF and a basket of spot LNG prices.
When the market correction mechanism is triggered, orders for front-month TTF derivatives with prices above the pre-defined level would not be allowed to be executed.
While gas prices in Europe over the previous decade were within a range of €5 ($5.14) to €35, in August they reached levels more than 10 times higher, the commission said.
Month-ahead prices spiked well above €200 and reached its peak at almost €314 on 26 August 2022, according to the EU’s executive. For two consecutive weeks in the second half of the month, the benchmark remained above €225 and between Aug. 22 and Aug. 26 it was very close to or above €265. The spread between spot TTF and LNG prices reached around €57-58 in the second half of that month.
The commission — which drafts legislation in the bloc — is trying to find a way to limit prices while avoiding risks to security of supply and ripple effects in the internal energy market. EU leaders last month unanimously called on the executive to propose measures including a temporary “dynamic price corridor” on gas transactions.