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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Clock Is Ticking For The EU To Agree On A Gas Price Cap

  • As temperatures drop across the European continent, EU members continue to struggle to come to an agreement on a gas price cap.
  • Disagreements on the very idea of the cap and its level continue in the EU Commission.
  • JPMorgan analysts believe that if the price cap is to be meaningful, it needs to be set at 150 euro per MWh or lower.

Winter is settling across Europe, bringing freezing temperatures that are leading to higher energy consumption, and the EU is still wrangling about the gas price cap that 15 members insisted the bloc implemented to shield them from more price excess. Time is running out for the EU. The 27 members of the EU are currently discussing the cap proposed by the European Commission last month, which did not win unanimous support when it was presented to everyone. On the contrary, the level that the Commission had set for the cap was widely considered to be too high and combined with such conditions as to effectively make the cap impossible to implement.

At 275 euro per megawatt-hour, which is about $287, the ceiling price for natural gas on the European market had to remain in place for two weeks before the cap mechanism kicked into action. Also, the price of gas in Europe had to be at least 58 euros above the average LNG price on the spot market for 10 consecutive days within those same two weeks, to make matters even more complicated and unlikely to happen.

Mostly, the opposition seems to focus on the level of the price cap, which is why Czechia this week came up with an alternative, lower cap, at 220 euro, according to a Bloomberg report.

The current rotating president of the EU proposed not just a lower ceiling but also a shorter period before the cap enters into effect from two weeks to five days, which, in all fairness, would make a lot more sense: this summer, when gas prices topped 300 euro per MWh, they did not remain at 275 euro or more for two weeks but the effects of that price spike were devastating.

Related: U.S., UK Launch Partnership To Boost Energy Security And Lower Prices

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Meanwhile, disagreements on the very idea of the cap and its level, if ever agreed, continue. Some EU members are pushing for an even lower cap, which, according to JP Morgan analysts, makes sense. In fact, Bloomberg reports, these analysts believe that if the price cap is to be meaningful, it needs to be set at 150 euro per MWh or lower.

Yet any suggestion in that direction would immediately prompt opposition from those already against the price cap, including the European Commission itself, which said it was not a good idea from the very beginning. France is also against too low a cap and Germany was the strongest opponent until it was convinced to at least her a proposal.

“I’ve already said that we can’t have a cap that is too low; otherwise, we can’t have supplies,” French President Emmanuel Macron said this week at a meeting of EU leaders in Albania. “There must be a cap mechanism to prevent peaks. That’s what we’ve decided as Europeans.”

The thing is, though, that Europeans, in the face of their leaders, have not decided anything yet. And time is running out. Yesterday, gas futures rose by 4.9 percent as cold weather descended on northwestern Europe, as it usually tends to do around this time of year. And the closer we move to the end of this year, the colder it is likely to become, prompting higher prices still.

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An agreement on what to do about them, therefore, is indeed quite urgent. Whether capping prices is the best that can be done about the EU’s problem is another question. According to the latest updates, the EU cannot even agree on Czechia’s proposal for a substantially lower cap and also a lower premium of benchmark prices over LNG spot market prices.

Then there is the problem of too many proposals. While EU leaders debate the Czech proposal, the Netherlands has suggested Europe only caps the price of gas that is bought by government companies, while several other countries including Belgium and Poland have proposed a moving price cap, according to a Reuters report from Tuesday.

While the EU discusses price caps, however, it is not doing other things that might alleviate the heavy financial burden of gas bills, according to an analysis of the Oxford Institute for Energy Studies.

In a paper out this week, the research center said that “The time spent on discussing gas price caps and the October and November proposals has a real opportunity cost for European energy markets. The proposals do nothing to solve the fundamental problem underlying price increases, namely the severe curtailment of Russian gas supplies. Time would be better spent on measures which reduce gas demand or supporting those who suffer most from high gas prices.”

In fairness, governments in Europe have tried to support their most vulnerable, often with direct payments to help them meet their energy expenses but this cannot be a long-term solution, especially when your other big goal is reducing energy consumption to be able to cope with available supply.

What this means is that whatever the EU agrees with regard to the price cap, it will neither be enough nor timely. Winter is no longer coming, it is here, it is freezing, and for millions of Europeans, the choice is between paying exorbitant bills or freezing. And the latter is never the first choice.

By Irina Slav for Oilprice.com

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Leave a comment
  • Francisco Napoleao on December 08 2022 said:
    The price cap paranoia is going to backfire they all know that but they keep playing with fire.
    They should instead address the problem in the rooths.
    - Gas prices are high because the demand is higher than production
    or
    - Gas prices are high because there is market manipulation.
    As we know both are true.
    The EU has taken one of the major players out of the market. They knew it was a bad idea to play with energy. Back in may by the 6th package of sanctions there was enough voices adverting for that danger.

    One has to agree a price cap is a invitation for a price floor.

    Now someone has to clarify something. If there is a price cap imposed does that means that contracts can be deemed invalid? There is an obvious manipulation on the price at which the contracts stipulate the price.

    How much of gas does the EU gets bought at the spot markets? Isn't it way to dangerous that producerg will just send their gas elsewhere?

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