Conflict Alerts

Conflict Alerts # 576, 22 December 2022

The EU: The new gas price capping regulation
Ankit Singh

In the news
On 19 December, European Union energy ministers reached a consensus on a market correction mechanism on recent fluctuations in liquified petroleum gas (LNG) prices. The regulation, a price capping mechanism for LNG trade is likely to be implemented by 15 February 2023 and will be activated if the LNG price at the Dutch Title Transfer Facility (TTF) is above EUR180/MWh (USD4.34/mmBtu) for three consecutive days on TTFs front month contracts. Once the mechanism is triggered, trade would not be permitted on the front-month, three-month, and front-year TTF contracts at a price more than EUR 35/MWh above the global reference LNG price.

On the same day, the Czech Minister of Industry and Trade, Jozef Síkela, who holds the rotating EU Presidency said: “We will set a realistic and effective mechanism, which includes the necessary safeguards that will steer us clear from risks to the security of supply and financial markets stability. Once again, we have proved that the EU is united and will not let anybody use energy as a weapon.”

Issues at large
First, energy crises due to price fluctuations. Europe has been reeling under an unprecedented energy crisis following the Russia-Ukraine war which has triggered record levels of inflation. The conflict has pushed Europe to look for alternatives to avoid being blackmailed on energy security by Russia and compelled governments in the EU to arrange for extra funds. The highly volatile LNG trade has witnessed an increase of around 264 per cent since January 2022, while the drops in prices have also been over 200 per cent in the past 11 months.

Second, disparities and affordability issues within the EU. The excessive LNG pricing has exposed the faultlines in a seemingly united EU. The deal was supported by most EU members but its biggest consumer, Germany, had initially objected to the gas pricing mechanism and finally relented. The shift happened after its demands for changes to another regulation on speeding up renewable energy permits and stronger safeguards were added to the cap. The Netherlands has doubled its LNG import capacity to 24 Bcm/year and its LNG terminals will soon reach their full capacity, according to a report by SP Global. The Netherlands has also abstained from supporting the regulation as it fears the low cap could cause the sellers and LNG exporters to look for better-paying customers. The TTF has also maintained that it is reviewing the consensus reached by the EU; it had indicated earlier that it may move gas trading out of the EU if the price cap was approved. Hungary also voted against the mechanism.

Third, market intervention by the neo-liberal EU. Dutch energy minister Rob Jetten said: "Despite the progress the last couple of weeks, the market correction mechanism remains potentially unsafe." Goldman Sachs sees the mechanism as a factor that could further cause market disruptions as the sellers were not consulted and the demand side remains oblivious to corrective mechanisms that the EU could impose on itself to calibrate with current circumstances. The intervention by the EU on LNG has disrupted the global LNG supply routes and many developing countries are suffering from gas shortages as the EU could offer a higher price.

In perspective
First, seeking guarantees without adequate infrastructure. Europe is on a path to substitute its reliance on Russian energy in an attempt to deter energy from being used as a weapon. The ground reality, however, is Europe’s lack of LNG import terminals has exasperated the importers who have to wait for the offsetting of the LNG in terminals to be released into inland Europe while those who could not afford the expensive LNG wait in vain in cold and dry winters.

Second, the increasingly important role of the US in the EU’s LNG imports. The US now exports more than a third of its LNG to Europe, while Russian exports which used to be around one-third have been reduced to 17 per cent. The US has come to rescue Europe by supplying 70 per cent of its LNG cargoes diverting them from Asia to Europe.

Third, from market intervention to a market correction. The price mechanism caps the maximum price of LNG that the EU members are willing to pay at USD 5/mmBtu, which is not much higher than the global average. This has the potential to cause speculations in the market resulting in adjusted expectations and creating scope for other countries to plan on paying the LNG bill. Europe’s rich man status assures guaranteed payments, however, the price cap being almost in line with the global average makes the price cap redundant. This points to the possibility of the mechanism signalling an anti-Russia agenda rather than ensuring energy security, at least in the medium term.

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