What is wrong with the European draft gas price cap
What is the draft gas price cap defined by the member states of the Union and what are the main critical points. Sergio Giraldo's article
Yesterday morning the Deputy Permanent Representatives of the 27 member states of the European Union met in the Coreper I Committee to discuss a long list of items on the agenda. The assembled ambassadors must have jumped when the European Commission pulled the trump card: a terse document that outlines a cap on the price of gas.
After the tense exchange of letters in recent days between the President of the European Council Charles Michel and the President of the Commission Ursula von der Leyen, in which Michel urged von der Leyen to present the proposal for a price cap, Commission technicians have finally disclosed a draft with the essential characteristics of the new creature.
From what we have been able to see, it is noted first of all that the floor was removed from the corridor imagined by Roberto Cingolani, now a consultant to the Minister of the Environment and Energy Security Gilberto Pichetto Fratin, so that now we are only talking about the roof. This maximum, whose implementation mechanism will be valid only for one year, will apply only and only to the future of the first calendar month traded on the FTT, the so-called month ahead. Therefore, it will not apply to the subsequent product curve or to bilateral trade outside regulated markets, the so-called OTC (over the counter). The reason is that it would be impossible to fix maximum prices for a forward curve without distorting the market, on the one hand, and on the other it would be impossible to control OTC trading. This means that only gas that is to be delivered in the month following the current month and traded on the TTF would be "protected" by the price cap: therefore, as of today the cap would apply only to the December future traded on the TTF, then only to the January, and so on.
The value of the ceiling, which will certainly be the subject of endless discussions, will be static and fixed and it will be possible to suspend or cancel it at any time, by decision of the Commission in the event that it deems that there are disturbances on the market. The price cap will be activated only if the prices of the future month ahead are higher for at least one week (perhaps two) than a certain value, and the spread between the spot gas price at the TTF and spot LNG is higher than a certain value for a certain number of consecutive days. Yesterday someone assumed an indicative value for the ceiling of around 250 €/MWh, others assumed 300 €/MWh.
As is known, the gas market has been unbalanced by the insane policies of the European Union. First of all, the green deal, which has discouraged investments in hydrocarbons while Europe is still totally dependent on them, restricting supply while demand grew. Then, the creation of an asymmetrical market, with a gas supply concentrated for 50% in the hands of a single subject, Russia. Subsequently, the explicit declaration of wanting to do without Russian gas with empty storages and no supply alternatives, which prompted all of Europe to hoard gas, even liquid gas, driving up prices. The result of all this was the price record of 352 €/MWh at the end of August 2022, while in March 2021 it was around 18 €/MWh, 20 times less.
Now we would like to attribute to an ex-post mechanism such as the price cap the task of avoiding high prices which, it is said, are the work of speculation. It is actually a clumsy attempt by those who have implemented these suicidal policies to save face in front of public opinion.
As can easily be deduced, the proposed price cap is completely useless for the purposes of a real drop in prices, which can only be achieved by rebalancing the fundamentals of supply and demand. In order not to influence the market, the value of the ceiling will be so high as to be very expensive in any case (€250/MWh is more than thirteen times the value in March 2021), it will only apply to a small part of the market (the front month future at the TTF ) and only if two conditions occur simultaneously for a certain period of time. It will be difficult for it to really activate. Even if the cap were activated, it is easy to imagine that the offer would react by shifting trading to the spot market or the OTC market, if not to the month following the first expiring one, in any case creating disturbances which would lead to an instantaneous suspension. After all, the winning key to the device, which perhaps will allow him to get the go-ahead even from rebellious Germany, lies in its immediate annulment, at any time.
There is still a lot to discuss, but the feeling is that the Commission has decided to give the Council what it wants, in this game of roles, by proposing a completely residual and useless tool, which will probably never be used, but whose the Council made a point of honour. Thus, the Commission will have done what was required and the Council will have had its trophy to show. Everything is fine in Brussels.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/price-cap-gas-naturale-bozza/ on Sat, 19 Nov 2022 06:11:33 +0000.