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Europe’s Plan to Cap Gas Price

 Europe Gas Price News

  • The proposal to cap energy price at 275 euros a megawatt hour will be debated by energy ministers from the bloc’s 27 member countries.
  • Logic behind the proposal: The EU hopes the ceiling will help member states to control energy prices for homes and business that have reached record highs following Russia’s invasion of Ukraine, leading to increased cost of living.
  • Support: Countries such as Belgium, Greece, Italy and Poland are among the countries most vocal in demanding a gas price cap to be implemented.
  • Opposition: Germany has opposed the move to cap could make it difficult to attract much needed gas supply and reduce the incentive to curb gas consumption.

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Working of The Europe Gas Price Cap

  • The EU is planning to apply the cap to month-ahead derivatives on the Title Transfer Facility (TTF) at Netherlands, which is a gas exchange that serves as Europe’s price benchmark.
  • The price cap would come into existence if the front-month TTF settlement price exceeds 275 euros/MWh for two weeks and if TTF prices are 58 euros higher than a Liquefied Natural Gas (LNG) reference price for 10 consecutive trading days within the two weeks.
  • If any of the above conditions are met, trades above the cap level would not be accepted. However, this would not affect over-the-counter (OTC) trade.
  • Over-the-counter (OTC) trade will act as a safety valve for critical deliveries while being unlikely to take over any major share of trade.

 

 Europe Gas Price Similar Plans

  • The EC was planning to cap Russian gas price, but the idea was dropped after resistance from central and eastern European countries, who worried that Moscow would retaliate by cutting off the existing gas supplies.
  • However, price cap would not have reduced European gas prices, but would rather function as a geopolitical move to cut revenues to Moscow.

 

 Europe Gas Price Possible Implications of the ove:

  • Energy supply shortage: The Association of European Energy Exchanges (Europex) has said that the plan could pose a major risk to financial stability and supply in Europe’s energy markets.
  • Move to OTC trade: The price cap could force utilities to stop forward buying and selling, called hedging, of their gas production and consumption and lead them to move to more OTC trading, which is not capped.
  • Affect LNG supply: Some opposers have also said that the cap could make it harder for utilities to attract LNG deliveries.

 

Way Forward

  • Long term benchmark: The price cap is a temporary measures and EC has asked for lasting alternative price benchmark for gas in Europe.
  • LNG index: The price of LNG is based on the gas price at the TTF hub. The reduction of Russian gas supplies has made the TTF price extremely volatile, often exceeding prices of LNG.
    • There is a demand for a new index since the TTF is based on pipeline supply and no longer represents a market that includes more LNG.

 

Europe Gas Price Dependence on Russian Gas

  • Russia contributed to about 40% of Europe’s gas needs before the invasion. Since then, the share has dropped to around 8% as Russia has cut supplies to Europe.
  • If the invasion had not taken place, the reliance on Russia would have increased to 50 to 60% of all gas imports as EU is planning to reduce consumption of fossil fuels such as coal.
  • The dependence on Russian gas is due to its lower cost, as well as easier transportation into the EU.
 Europe-Gas-Price-Chart
Europe-Gas-Price-Chart

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