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“Floating” gas price ceilings and increased use of market power - energy and climate

“Floating” gas price ceilings and increased use of market power – energy and climate

On Tuesday, the European Commission introduced a new package of measures for gas. This is taking place after a long tug of war within the Commission and between the European Commission and the 27 member states.

Commission President Ursula von der Leyen stressed at the press conference that this was a package that was supposed to combat high energy prices and secure supplies.

The Commission is not proposing a fixed price ceiling for all EU gas, but a flexible mechanism to slow the worst price volatility.

In turn, the EU must harmonize its market power to be able to put pressure on suppliers such as companies that produce gas from the Norwegian continental shelf. In the longer term, the EU will set a new reference price for gas in addition to the Dutch fund. This should be ready in the spring. The new gas will largely reflect the increased import of liquefied refrigerated gas (LNG) into the European Union.

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short and long term

The rise in the price of gas is what raises the price of electricity. Therefore, taking measures against rising gas prices is critical to the entire energy market. But the package does not solve the basic problem, which is that there is little gas on the market. This will likely lead to higher energy prices until 2025, and possibly longer.

The proposals the Commission is now putting forward will be treated largely as temporary crisis measures, for a period of one year initially. This means that it is the member states that make the decisions, without recourse to the European Parliament. This means fast processing, and possibly a resolution in a few weeks. But the Commission proposes to remedy this democratic shortcoming by creating a liaison group with Parliament to keep it up to date.

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gas joint purchase

UNHCR wants to strengthen the common procurement platform. It will coordinate the filling of gas reserves until 2025. If the warehouses are empty at the end of this winter, reaching the target of filling 90 percent by November 2023 may be more difficult than it was to fill the warehouses this year.

Here you can read Presentation of the Authority’s proposals.

The Commission estimates that the EU will need up to 100 billion cubic meters of additional gas annually. A year to 2025, if all gas from Russia stops. This is roughly what the EU buys from Norway in a year.

This is how the EU will put pressure on gas sellers:

Gassco terminal in Zeebrugge, Belgium, where large volumes of Norwegian gas flow to the European market. Photo: Gasco
  • Collect the order and search for offers.
  • Member states are obligated to participate in joint procurement for at least 15 percent of their stock obligations.
  • A voluntary trading system that allows companies to form a gas trading association. Russian companies are not allowed to participate.

An important justification for this joint purchase of gas is that companies in the member states should not compete with each other and thus raise the price.

The battle for price ceilings

There has always been increasing pressure on the European Commission to come up with some form of a price ceiling for gas. I refused, because the general price cap on all types of gas could affect the security of supply. Today, European Union countries buy a lot of refrigerated liquefied gas (LNG) that is transported on board ships from the USA and the Middle East. It could end up in Asia if the European Union sets the bar too low.

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It’s the Dutch gas exchange Dutch TTF Which largely determines the price of gas on the European market.

At the end of August, the price of gas was Dutch TTF 346€/MWh, now it’s down to 117€/MWh and a year ago 44€/MWh. In the spring of 2021, it was less than 20 euros / MWh.

It is the large fluctuations in prices that the European Commission wants to put an end to by proposing. The price of gas in the European Union will remain higher than in Asia, for example, to ensure the flow of LNG from the USA and the Middle East. Gas The EU countries will be completely dependent on even winter if they want to avoid rationing.

What is an “unreasonably high price”?

The Commission says the aim of today’s proposal is to rein in “unreasonably high prices”. But it does not now refer to what “unreasonably high prices” mean, ie how much the EU would pay above the world market price.

These details will be reproduced in our detailed proposals, after the EU countries agree on this principle.

Long term solution

This dynamic price cap will continue while the EU works to create something that could replace the TTF as the EU’s gas price limiter. Acer will begin collecting data for this new indicator early in the year. It should be in place when EU countries fill gas stocks again in the spring of 2023 and hopefully provide a gas price that closely reflects the costs of gas production.

Liquefied gas (LNG) from the United States arrives in large quantities on board ships to the countries of the European Union. The rising cost of LNG is driving up energy prices. Photo: EU Commission Information Service

The Committee believes that the funds no longer represent the costs of imported gas. This was the case when cheap pipelined Russian gas dominated imports. After Russia cut off gas exports, pipeline gas became a price driver and an unstable resource. Much of Russian gas has now been replaced by liquefied natural gas from the United States and the Middle East. This means that you have to have a different reference price, which cannot be subjected to the same degree of speculation, which is the goal of the EU.

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Is this enough?

A number of EU countries want a Spanish/Portuguese model for price ceilings. There is a subsidy for gas used to produce electricity. The Commission is skeptical of such a model for the whole of the European Union, but on the other hand is open to discussing such a solution further with member states. The assumption is that this does not lead to an increase in gas consumption and takes into account the different financial situations of the EU countries. Not all EU countries have the financial resources to subsidize gas.

The rest of the world will get the first reactions on whether EU countries think this measure is comprehensive enough at the EU summit on Thursday and Friday this week. In addition, when energy ministers meet on October 25.

In advance, EU diplomats from different countries warned the Commission against taking too weak measures. But although the vast majority of EU countries have expressed support for the price cap, it is not the case that the same countries agree on a model for it. The solution presented now is the same as it was Hot topic at the informal meeting of energy ministers in Prague a week ago.

The commission will also work to strengthen solidarity mechanisms among member states, so that gas reaches where it is most needed.

The EU Energy Commissioner, Kadri Simonsen, said this mechanism would be important, because a winter supply crisis could not be ruled out.