The European Commission has tabled a new proposal calling for a “safety ceiling” on natural gas prices in a bid to reduce volatility on the European gas markets, according to a statement from the commission dated 22 November.
The proposal targets Europe’s gas price benchmark a month in advance on Europe’s largest gas trading hub — the Dutch TTF. The pivotal reference for the European wholesale market has been affected by the unpredictability of the flow of Russian gas to the continent throughout the current year.
Under the new proposal, the “safety price ceiling” of €275 ($286) on the immediate month ahead on the TTF will automatically trigger when market conditions show the front-month TTF derivative settlement price exceeds €275 for two weeks and TTF prices are €58 higher than the liquefied natural gas reference price for 10 consecutive trading days within the two weeks.
When these conditions are met, the European Union Agency for the Cooperation of Energy Regulators will immediately publish a market correction notice in the Official Journal of the European Union and inform the EC, European Securities & Markets Authority and the European Central Bank. The price correction mechanism will come into effect the following day.
“We propose putting a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes. The mechanism is carefully designed to be effective while not jeopardising our security of supply, the functioning of EU energy markets and financial stability,” said EC Commissioner for Energy Kadri Simson.
The proposal suggests that the capping mechanism is automatically lifted, whenever its operation is no longer justified, to shield against possible negative consequences of the price limit, and recommends it starts on 1 January 2023.
The gas price cap mechanism would include any time that the gap between the TTF price and the LNG spot price no longer exceeds the €58 price difference during 10 consecutive trading days, while the benchmark month-ahead product price falls back to under €275, according to the statement.
This is not the first time the EC has tried to win support for a price regulating mechanism through the European gas markets.
On 19 October, the EC proposed a “price correction mechanism” for the TTF spot gas market, with special focus on the intraday rate. However, this gained little traction due, in part, to concerns from Germany and elsewhere about deterring LNG sellers potentially looking to trade with Asia.
Analysts warned that a price regulatory instrument would put Europe’s security of supply and competitiveness at risk when bidding for LNG in the global market.
“By raising a discussion on price caps for natural gas, the EU weakens its position as a gas buyer,” said Petter Osmundsen, professor of petroleum economics at University of Stavanger in Norway. “The development of gas fields depends on trust and this is now weakened.”
Norway has reduced the extent of gas injection into oil reservoirs, and increased gas exports, at the expense of oil production, courting controversy at home about the possible negative impact on ultimate recovery on oilfields.
Osmund warned about the risk to countries such as Norway, which is looking to increase gas supplies to Europe but does not always find the anticipated level of interest in licensing rounds.
“Development of gas fields linked to pipeline networks to EU countries results in locked-in investments. Once the investments have been made, one is exposed to political risk in that the recipient countries can move away from the contract premises that were the basis at the time of development,” he said.
But analysts worry about the effects of market intervention by national governments or the EU because the TTF price may lose its value as the reference for negotiating long-term contracts, possibly making contracts with European customers less likely than before.
“If TTF is going to be capped then it will no longer be a price that fully reflects the market,” said Tom Marzec-Manser, head of gas analytics at Independent Commodity Intelligence Services. “It also becomes much harder to hedge.”
EU diplomats were also due to continue discussions on Thursday over a proposed price cap on Russian oil exports due to start on 5 December.
Reports were circulating widely in Brussels about differences of opinion among member states over the most appropriate price per barrel, ranging from Poland wanting to be tougher on Russia, and Greece keen to avoid too much of an impact on its own tanker industry.
The backdrop to the EU debate is the G7 — the US-led seven most developed economies — plan to cap Russian crude prices in order to reduce the flow of dollars used to fund the Russian war effort in Ukraine.