Pipes run along a technical facility for compressing natural gas on the positioning of astora GmbH’s Rehden natural gas storage facility, the biggest in Western Europe.
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The European Union Monday concluded two months of heated talks over easy methods to protect households from rising energy prices — but some analysts argue the bloc’s solution is unsustainable and won’t withstand the realities of a 2023 gas supply crunch.
EU members compromised by adopting a “dynamic” cap on the worth that could be bid for front-month gas contracts on Europe’s benchmark trading facility.
The extent at which the cap is triggered was lowered to 180 euros per megawatt hour, after an initial proposal of 275 euros per megawatt hour was criticized as far too high by countries including Poland, Spain and Greece.
The 180 euro limit should be surpassed for 3 working days on the Dutch Title Transfer Facility (TTF), and it should be 35 euros per megawatt above the worldwide reference price for liquefied natural gas over the identical period.
Several conditions were inserted to allay the concerns of members similar to Germany, which had argued that the scheme could lead to gas shortages next yr. These clauses prompt an automatic suspension of the cap and include the dynamic bidding rate dropping below 180 euros per megawatt hour for 3 consecutive working days, or the European Commission declaring an emergency.
Germany eventually voted in favor of the so-called “market correction mechanism,” however the Netherlands and Austria abstained.
Austria’s ministry for climate motion said in a Tuesday statement that while it was “confident that the market correction mechanism can play a vital role to avoid extreme spikes in European gas prices, the last minute extension of the mechanism on more gas hubs than the TTF does issue some concerns.”
The ministry noted that “there are some risks that the essential safeguards are undermined by this extension.” Austria depends upon Russian gas.
Rob Jetten, Dutch energy minister, said that the mechanism remained “unsafe” despite the newest improvements. He flagged that it could disrupt the European energy market, risk security of supply and have wider financial implications.
“From its inception, we have now been very clear about this mechanism: it doesn’t solve the core problem,” he said, adding that the Netherlands’ concerns were shared by the European Central Bank and by ICE (Intercontinental Exchange), the operator of the important thing natural-gas market in Europe.
The ECB earlier this month said “the present design of the proposed market correction mechanism may, in some circumstances, jeopardize financial stability within the euro area.” It declined to supply further comment to CNBC following the EU announcement.
ICE said in an announcement it had “consistently voiced concerns” in regards to the destabilizing impact of a price cap. It added that it could now review the main points of the EU announcement to see whether it “can proceed to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations.”
Easy to overturn?
The EU argued the mechanism will likely be monitored recurrently and could be stopped if financial stressors or supply challenges are raised, in response to concerns flagged by the likes of the ECB.
Analysts told CNBC that these conditions called into query the flexibility of the mechanism to limit energy price rises.
“It reflects the challenge between strong rhetoric and the realities of the safety of supply,” Nathan Piper, head of oil and gas research at Investec, said by phone. “It is a cap, but allows them to operate above the cap in the event that they actually need the gas. The actual fact on the bottom is, when you need the gas, you can pay any price, which is what Europe did in 2022.”
Piper listed two possible areas of additional upcoming demand: China and Europe. Beijing this month abruptly relaxed the zero-Covid policy it pursued this yr. Europe has meanwhile managed to get its gas stores near-full for this winter by continuing to import Russian gas supplies — but plans to drop this intake drastically in 2023.
Europe and Asia remain net oil and gas importers, Piper continued, which suggests that intense competition for spot cargoes lies ahead. Around 70% of liquefied natural gas (LNG) is tied up in long-term contracts, leaving 30% available on a spot basis.
In a Tuesday interview with Reuters, Norway’s prime minister Jonas Gahr Støre said he didn’t expect more Norwegian LNG to be exported outside of Europe because of this of the brand new EU measure.
But Piper said, “There is no such thing as a motivation for spot LNG carriers [other] than the very best price. So volumes could go up elsewhere, and [European] security can be jeopardized.”
Janko Lukac, senior analyst at Moody’s Investors Service, echoed this sentiment to CNBC: “The efficiency of an unilateral cap on purchase prices from the EU is extremely uncertain.”
“LNG markets globally and structurally will likely be short for the subsequent couple of years. Hence, if a global buyer is willing to pay the next price, Europe runs the danger that the respective volumes will go to a different buyer,” he said.
Long-term measures
Energy Minister Rob Jetten said it was more necessary for the EU to give attention to its electricity savings targets, on joint gas purchasing agreements and on issuing faster permits for renewable energy schemes.
Ending energy dependency was the important thing reason why Pavel Molchanov, managing director for renewable energy at wealth management firm Raymond James, said the mechanism was a “stop-gap measure.”
“The answer for Europe will likely be to diversify its energy mix away from fossil fuels entirely,” Molchanov told CNBC’s “Squawk Box Asia” Tuesday.
“Because it stands, about 20% of Europe’s electricity comes from natural gas, 10% comes from coal. Each of those commodities are up dramatically because of this of the war, and the Kremlin’s weaponization of energy exports.”
Energy transition solutions — similar to wind, solar and green hydrogen, in addition to increasing energy efficiency and removing coal from the electricity mix — might be placed on an accelerated timetable to rid Europe of natural gas concerns inside five years, he said.
Ending the war premium
EU ministers in favor of the mechanism were upbeat about its impact.
Kadri Simson, European commissioner for energy, said the initiative would “take away the war premium, the mark-up in comparison with global LNG prices, that Europe pays” attributable to pricing on the Dutch TTF.
Tinne Van der Straeten, Belgium’s energy minister, said the move would ensure security of supply while protecting residents and the economy from higher prices.
Investec’s Nathan Piper also said that there have been strong explanation why Europe needed to bring down gas prices beyond the strain on households.
“Very high gas prices for multiple years can have major impacts on the competitiveness of European industry. The U.S. gas price is a fraction of Europe’s because they’re self-sufficient, so industry could move to where input costs are lower,” he said. “Which means a long-term risk for Europe and the U.K. if energy costs cannot come down.”
