Is the EU gas price cap really impactful?
The EU finally agreed on a plan to cap the wholesale price of natural gas on December 19, after many months of wrangling, when at times it appeared that member states would never reach a consensus. However, some experts still doubt it would have a significant impact on prices and markets, despite the amount of effort the EU put into achieving a deal.
The European Commission proposed in late November a cap on front-month TTF gas contracts of €275/MWh, or around $3,000/'000 m3, to be triggered when the price is exceeded for two weeks, and if TTF prices are €58/MWh higher than the LNG reference price for 10 consecutive trading days within the two weeks.
The proposal faced ridicule, because the high level of the cap, combined with the conditions, means it would not have been triggered at any point this year, even when TTF prices spiked at an all-time high in late August.
The agreed cap will more easily be triggered. It will come into force whenever the front-month contract exceeds only €180/MWh for three days, and if they are higher than global LNG prices by more than €35/MWh in the same three days. It will also apply to three-month ahead and year-ahead derivatives, and can be triggered starting from February 15 next year.
Germany was one of the countries most concerned about the cap proposal, fearing it would negatively impact the EU's security of supply, potentially by giving suppliers an incentive to send LNG cargoes to Asian markets rather than Europe. Others, including the Czech Republic, which currently holds the presidency for the EU council, were pushing for a low price cap that could be easily triggered.
While the agreed cap is more likely to come into force compared with the commission's original proposal, experts still doubt that it will actually be used.
"I think that the triggers are complex so it might not be used, but it is already having a negative impact: suppliers will try to not index their prices to TTF any longer," Thierry Bros, energy expert and professor at Po Paris, tells NGW.
"This measure might be effective. It seems designed to limit price gains in a short-term, weather-related gas shortage, in my opinion, and then only if the price is breaking significantly away from LNG prices," Ronald Smith, oil and gas analyst at Moscow-based brokerage BCS Global Markets (BCS GM), adds. "Therefore, I don't think it will likely affect LNG supply to Europe."
"The most likely scenario is that it will limit a late-winter price spike to only $2,000/'0003m when it might have gone to $3,000/'000 m3 for a few days during a period of cold weather when storage is low (in late February, for example)."
Smith notes that the impact on the revenues of Russia's Gazprom "should be minimal in this scenario, as limiting gas prices to $2,000 versus $3,000 for a few days will make little difference in the yearly average price."