The cap on the price of gas imports agreed by the European Union (EU) seems to be useless. At least that is what the European natural gas futures contracts traded on the Dutch platform predict.
Specifically, the “market correction mechanism” would be activated if prices were above that threshold for three consecutive business days. In addition, it requires another condition: that it exceed the reference price of the global markets for liquefied natural gas (LNG) by 35 euros/MWh.
In this way, after consulting the future European contracts, the cap would not work in all of 2023 and would remain as an emergency mechanism in exceptional situations such as the one that occurred in August of this year, when gas priced above 300 euros/ MWh for several days.
Specifically, the futures mark 107.68 euros/MWh for the first quarter of 2023, 108.19 euros/MWh for the second, 108.850 euros/MWh for the third and 110.63 euros/MWh for the fourth. Europe has done its homework and has underground storage at 84% capacity, which also means that there will be a relaxation in the price of raw materials.
gas price drop
Since Friday, August 26, the last business day of trading in the TTF before the idea of a gas cap emerged, the price has experienced a significant drop, from the 339.2 euros/MWh that it touched that day to about 110 euros / current MWh. The maximum price of gas occurred in March and was 345 euros/MWh.
The cap, which may be applied as of February 15, 2023, will affect the contracts linked to the TTF and also the rest of the large European indices, although options are included to unlink them. The intraday market, over-the-counter (OTC) and daily stock exchanges will be excluded.
The Energy Regulators Cooperation Agency (ACER) will be in charge of monitoring the functioning of the markets and indicating whether the conditions are met to activate the cap. In the event that it is put into operation, it will be used for at least 20 days.
This will deactivate the throttle cap
For its part, the limit will automatically remain without effect when global prices are below 145 euros/MWh for three consecutive days (that is, 180-35 euros/MWh). But the mechanism will not only stop working if the price falls below the established threshold, but the European Commission has reserved certain rights to stop it. It will be rendered void if Brussels declares a regional or EU-wide emergency in the face of a “rationing” situation in which gas supply is insufficient to meet demand.
Also if instability occurs in the financial markets, in particular, if an increase in the guarantee requirements for companies operating in organized gas markets is detected.
Another safeguard of the pact is that the mechanism will stop working if the demand for gas increases by 15% in one month or 10% in two months, LNG imports decrease significantly or the volume traded in the TTF falls significantly in comparison. with the same period of a year ago.
Before November 1, 2023, the Commission will carry out a review of the regulation in view of the general situation of gas supply and, based on said report, it may propose the extension of its validity.
Far from the Commission cap
The final agreement greatly reduces the proposal of the European Commission, which raised a maximum ceiling of 275 euros/MWh, far from the objectives of countries such as Spain, Belgium or Greece, the main promoters of the measure.
To soften the position of Germany, the Member States have agreed to introduce a voluntary point in the regulation that allows speeding up the procedures for Community environmental legislation, diplomatic sources, which in practice could lead to relaxing the views on developing the installation of renewable energy.
The anecdote of the day was carried out by the Czech delegation. She gave the rest of the ministers a sweatshirt with the logo of the Presidency and the message “We will convene as many Energy Councils as necessary”, which was popularized by her Energy Minister, Jozef Síkela.