The EU agreed to limit gas prices, but some analysts are skeptical

The pipelines run along the engineering facility for natural gas compression at astora GmbH’s Rehden natural gas storage facility, the largest facility in Western Europe.

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The European Union on Monday wrapped up two months of heated talks on how to protect households from soaring energy prices – but some analysts say the bloc’s solution is unsustainable and could cannot withstand the reality of the gas supply crisis in 2023.

EU members are harmed by adopting a “dynamic” limit on price could be bid for gas contracts in the previous month on a standard European transaction basis.

The activated limit has been lowered to 180 euros per megawatt-hour, after an initial proposal of 275 euros per megawatt-hour was put forward. Criticized by countries as too high including Poland, Spain and Greece.

The 180 euro limit must be crossed in three working days for the Dutch Transfer of Title Facility (TTF) and must be 35 euros per megawatt above the global reference price for naturalized gas liquid in the same period.

Some conditions have been put in place to assuage concerns from members such as Germany, which has argued the plan could lead to gas shortages next year. These provisions prompt an automatic suspension of the limit and include a dynamic tender rate that falls below 180 euros per megawatt hour for three consecutive business days or the European Commission declares a state of emergency.

Germany ultimately voted in favor of the so-called “market adjustment mechanism”, but the Netherlands and Austria abstained.

Dutch energy minister says EU-proposed gas price ceiling could be 'very harmful' to supply chains

Austria’s climate action ministry said in a statement on Tuesday that although it was “confident that a market adjustment mechanism could play an important role in avoiding a spike in European gas prices, extending the last-minute mechanism to more gas hubs than TTF does raise some concerns.”

The ministry notes that “there is some risk that the device protections needed to be undermined by this extension.” Austria depends on Russian gas.

Rob Jetten, the Dutch energy minister, says the mechanism remains “unsafe” despite the latest improvements. He flagged that it could disrupt European energy markets, pose risks to supply security and have broader financial implications.

“From its inception, we have been very clear about this mechanism: it does not solve the core problem,” he said, adding that the Dutch concern was shared by the Bank. Central Europe and ICE (Intercontinental Exchange), major natural gas market operator in Europe.

ECB said earlier this month “The current design of the proposed market adjustment mechanism could, in some cases, jeopardize financial stability in the euro area.” It declined to provide further comment to CNBC following the EU announcement.

ICE said in a statement that it has “repeatedly expressed concern” about the destabilizing impact of the price cap. It added that it will now review the details of the EU’s notice to see if it “can continue to operate fair and orderly markets for the TTF from the Netherlands in accordance with its regulatory obligations.” Europe or not.”

RBC's Helima Croft says Europe's gas price cap will not lead to lower prices for consumers

Easily exposed?

The EU argued that the mechanism would be monitored regularly and could be halted if financial stressors or supply challenges increased, in light of concerns warned by the ECB.

These conditions raise questions about the ability of a mechanism to limit energy price increases, analysts told CNBC.

“This reflects the challenge between strong rhetoric and the reality of supply security,” said Nathan Piper, head of oil and gas research at Investec. “That’s the limit, but allow them to operate above the limit if they really need the gas. The fact is, if you need the gas, you’ll have to pay any price, that’s what Europe has done. do in 2022.”

Piper listed two possible areas of additional demand coming: China and Europe. Beijing this month sudden relaxation the no-Covid policy it pursued this year. Europe meanwhile managed to get its gas outlets nearly full for this winter by continuing to import Russian gas supplies – but there are plans to drastically reduce this amount by 2023.

Mr. Piper went on to say that Europe and Asia remain net importers of oil and gas, which means stiff competition for spot commodities lies ahead. About 70% of liquefied natural gas (LNG) is concluded in long-term contracts, the remaining 30% is available on a spot basis.

In an interview on Tuesday with Reuters, Norwegian Prime Minister Jonas Gahr Støre said he did not expect more Norwegian LNG to be exported outside of Europe due to the new EU measure.

But Piper says, “There’s no incentive for spot LNG carriers [other] than the highest price. So the mass may increase elsewhere, and [European] security will be threatened.”

Janko Lukac, senior analyst at Moody’s Investors Service, echoed this view to CNBC: “The effect of unilaterally limiting purchases from the EU is highly uncertain.”

“The global and structural LNG markets will be in short supply over the next few years. Therefore, if an international buyer is willing to pay a higher price, Europe runs the risk that corresponding volumes will shift. to other buyers,” he said.

Long-term measures

Energy Minister Rob Jetten said it was more important for the EU to focus on electricity-saving targets, on joint gas purchase agreements and faster licensing of renewable energy programmes.

Ending reliance on energy is a key reason why Pavel Molchanov, managing director of renewable energy at asset management firm Raymond James, said the mechanism is a “precautionary measure.”

“The solution for Europe would be to diversify its energy mix away from fossil fuels entirely,” Molchanov told CNBC’s “Squawk Box Asia” on Tuesday.

“Currently, about 20% of Europe’s electricity comes from natural gas, 10% comes from coal. Both of these commodities have skyrocketed in price due to the war and the Kremlin’s weaponization of energy exports. quantity.”

He said energy conversion solutions – such as wind, solar and green hydrogen, as well as increasing energy efficiency and removing coal from the electricity mix – could be included. an accelerated timetable to eliminate European natural gas concerns within five years.

End of war premium

EU ministers who support the mechanism have been optimistic about its impact.

Kadri Simson, European Commissioner for Energy, speak The initiative will “eliminate the war premium, the premium to the global LNG price that Europe pays” due to pricing on the Dutch TTF.

Tinne Van der Straeten, Belgium’s energy minister, said the move would ensure supply security while protecting people and the economy from higher prices.

Investec’s Nathan Piper also says there are good reasons Europe needs to lower gas prices beyond the strain on households.

“Very high gas prices for many years will have a big impact on the competitiveness of the European industry. US gas prices are only a fraction of that of Europe because they are self-sufficient, so the industry Businesses can move to places with lower input costs,” he said. “That means long-term risks for Europe and the UK if energy costs cannot be reduced.”


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