European Union (EU) energy ministers will likely weigh proposals for natural gas price caps and other protective measures after weeks of questions from members, but researchers expect a consensus will be hard fought.
Leaders from the 27 EU member countries are expected to meet Thursday and Friday to possibly implement a price cap on gas, an alternative benchmark to the Dutch Title Transfer Facility (TTF) price and solidarity agreements, according to a leaked draft document detailed by Reuters and Bloomberg.
Members agreed last week on proposals to jointly buy natural gas as a part of an emergency safety net, but disagreements and confusion on whether or how to propose a price cap led leadership to postpone considerations. A week later, experts are still having difficulty estimating the impacts of a price cap given the varying schemes and stipulations that have yet to be decided.
“It is hard to see the pros and cons at present as numerous ideas are still flying around,” Kpler Inc.’s Ana Subasic, LNG analyst, told NGI. Although the meeting in Prague saw more support for joint purchasing, she said, “a price cap is still abstract.”
The lack of Russian supply, European gas prices trading nearly 90% higher than last year and prospects of potential power shortages have increased pressure on EU leaders to agree on energy measures to prepare for the upcoming winter season.
A proposal put forward in Prague by European Commission (EC) President Ursula von der Leyen last week outlined a potentially three month price limit for gas purchases linked to the TTF. This proposal has been included in a draft document for Thursday’s meeting in Brussels, according to Bloomberg.
Several member countries also support separating the link between gas and power prices by imposing a price cap on gas used for power generation. Senior researcher Marco Giuli, of the Brussels School of Governance in Belgium, told NGI capping gas prices as they relate to power might have “at least minimal consensus at this point” among countries.
However, European energy leaders have already pointed to conflicts getting members on the same page about which price cap scheme is being considered.
“The debate on a price cap is a confused one, because there are different caps different people talk about,” Germany’s Sven Giegold, state secretary for economic affairs and climate actions, said last week in Prague.
Subasic said a cap on wholesale prices like the ones instituted in Spain and Portugal earlier in the year could also “prompt more demand for gas-fueled power generation.”
“National market balances and budgets are negatively affected in the long run as it leads to even more gas burn and distorts the market,” Subasic told NGI.
Several financial institutions and researchers, including the International Energy Agency, have forecast that the EU will likely need to couple high storage injections with cuts in gas consumption to avoid a winter shortfall.
Potentially ‘Shifting Power Dynamic’
A proposed “dynamic price limit” on gas imports and a new benchmark is also causing potential confusion for liquefied natural gas exporters and international markets.
A price cap on LNG imports to Europe would challenge TTF´s premium over JKM in Asia, Subasic told NGI, “meaning there would be a shifting power dynamic in the spot market as flexible spot cargoes are attracted by the highest bidder and suppliers lay outside of EU jurisdiction.”
LNG imports into Europe are at an all-time high in 2022, according to Kpler data, with 78.93 million tons (Mt) imported so far. It is a 23% increase year/year and 10.15 Mt more than the previous record-breaking year in 2019.
Researchers have also questioned a possible cap on existing long-term import contracts with LNG exporters. Oxford Institute of Energy Studies’ Jonathan Stern, senior research fellow, said “long-term import contracts would account for only 50% of EU demand, and doesn’t deal with the rest of EU imports, which are effectively spot gas.”
Time is running out before cold weather sets in and, “the fundamental issue is that there is a shortage of energy,” the European Federation of Energy Traders wrote in an October memo.
“If we cap prices, this does not go away and we must ration demand anyway. A price cap would even exacerbate this by putting existing contracts and future supplies to Europe at risk.”
After the Brussels meeting this week, another meeting is planned for EU ministers on October 25. The EC could also call a special meeting to adopt policies agreed on during Thursday and Friday’s meetings.
Jacob Dick contributed to this report.
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