European energy traders push back against gas price cap proposal
European energy traders have rejected calls for the EU to impose a cap on all gas imports, warning that the move will lead to higher consumption and reduced supply.
A majority of EU member states support the policy, but the European Federation of Energy Traders (EFET) warned in a statement last week that a price cap would widen the gap between supply and demand and result in more energy rationing.
"The gas price is currently being set by the demand, not the supply side. Prices rise to a level where consumers self-interrupt, switch to alternative fuels, or invest in other energy saving measures," the EFET said. "Without this signal, consumption will be higher, and the shortfall will need to be resolved another way, e.g. mandatory curtailments."
What is more, the federation said that the high European prices for gas sent signals for cargoes contracted to Asia to be diverted to Europe instead, and incentivised the construction of new regasification capacity to remove bottlenecks.
The price cap will also jeopardise contracted and future gas shipments, the EFET continued.
"Long-term contracts typically have reopeners that can be triggered by regulatory change or the discontinuation or change in an index. Many existing contracts could be reopened, putting already contracted supply at risk," the organisation said. "LNG contracts in many cases take place outside EU jurisdiction (and indeed, sellers may insist that future contracts take place in international waters. An importer could redirect cargoes outside Europe rather than trade at a loss against a lower cap. The consequence would be a risk to security of supply."
Alternative contract structures may also develop to circumvent the cap, it added.
Market prices create allocative efficiency by ensuring that gas goes to the party that values it the most, and without them, limited gas will have to be allocated through rationing, or there must be an alternative means of allocation which is unlikely to be agreed on in the needed time frame.
"The fundamental issue is that there is a shortage of energy. If we cap prices, this does not go away and we must ration demand anyway," the EFET concluded. "A price cap would even exacerbate this by putting existing contracts and future supplies to Europe at risk. If demand can be managed down (whether through high prices, or through voluntary or mandatory reduction measures), then price signals should remain to allocate what energy is available efficiently. The EU can also help to remove infrastructure bottlenecks to enable additional LNG supplies to be shared further across the member states and vulnerable neighbours."