Gas, the EU commission proposes an impracticable “price cap” | Economy

BRUXELLES – The European Commission has presented in Strasbourg its formal proposal for a “correction mechanism” of the gas marketin response to the mandate for a “dynamic price ceiling” which had been given to the Community executive by the European Council of 20 and 21 October, and according to what it already provides (in articles 23 and 24, but without going into details), the proposal for a Council regulation which the Commission itself presented on 18 October.

The stated objective is to limit episodes of excessive natural gas prices unrelated to the prices of other gas exchanges, in particular on the market for LNG, liquefied natural gas, and will apply to the price of derivatives on the European TTF exchange of Amsterdam, who then determine the prices of retail gas transactions. The activation of the mechanism will essentially consist of a ban on executing one-month derivative orders on the TTF exchange above the established ceiling.

The mechanism, which will be set up as from 1 January 2023, is emergency and temporary, and can only be activated, if necessary, for one year, and only when a series of precise conditions occur on the market.

First, the price cap is proposed by the Commission at the level of 275 euro per Mwh for derivatives, one month on the stock exchange Ttf the Amsterdam; but for the correction mechanism to be activated, this limit must be exceeded for at least two weeks.

Furthermore, in the two weeks of exceeding the ceiling, there must also be, simultaneously and for at least 10 consecutive days, a divergence (“spread”) of at least 58 euros between the spot price of gas on the TTF exchange and a reference price for natural gas liquefied (LNG).

The reference price of LNG will be calculated on the basis of the daily average of a basket of indicators, consisting of the Daily Spot Market of the Mediterranean, the Daily Spot Market of North-Western Europe and the daily assessment of the price which will be produced by the Italian Cooperation Agency of Energy Regulators Regulators (Acer).

When all the conditions are met, the market correction mechanism can be activated directly and immediately by the Commission, and will be deactivated when market conditions disappear.

During an afternoon press conference in Strasbourg, the EU Commissioner for Energy, Kadri Simson, responded to several journalists who asked whether, as it is conceived, the proposal for the market correction mechanism could have been activated according to the situation on the markets in August, when the price of gas (today at 116 euros) had shot up, reaching a peak of 320 euros per MWh (on 26 August). The Commissioner’s answer, essentially, is that on that occasion the price did not stay above the ceiling for at least two weeks, set in today’s proposal at 275 euros.

Therefore, paradoxically, the Commission’s proposal presents conditions such that the market correction mechanism would not be activated even if a situation similar to that of August were to occur, which motivated the request for a “price cap” by the majority of Member states.

Furthermore, the Commission’s proposal provides for a series of additional safeguards which make it even more impracticable, or ineffective. First of all against the risks for energy security: transactions outside the regulated markets (OTC, “over the counter”) will be excluded from the “price cap”, which operators will always be able to resort to in the event of an emergency; but above all, the possibility for the Commission to temporarily and immediately suspend the mechanism if unforeseen disruptions occur that negatively affect the security of supply and gas flows within the EU.

Other caveats include that the mechanism should not have a negative impact on financial stability and the orderly functioning of derivatives markets across the energy sector, nor on gas flows between European countries based on market mechanisms, nor on long-term contracts, nor on the reduction in demand envisaged by a previous EU regulation. In the latter case, the mechanism will not apply if the mandatory gas reduction targets in the Member States have not been met.

The Commission’s proposal will now be on the table of the twenty-seven energy ministers at the extraordinary Council meeting on Thursday 24 November in Brussels.

(with source Askanews)

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