A gas price cap agreed by the European Union is easy to avoid and unlikely to meet the bloc’s goal of lowering energy prices, analysts and market participants said.
After months of wrangling over the idea, EU countries on Monday agreed on a gas price cap, which will be triggered if the European benchmark gas price exceeds 180 euros per megawatt hour and stays 35 euros per MWh above the price of liquefied natural gas for three days.
“We managed to find an important agreement that protects citizens from skyrocketing energy prices,” said Czech Industry Minister Jozef Sikela after the agreement was signed.
However, analysts and market participants questioned whether the cap will achieve this goal.
“In my view, that probably wouldn’t translate to savings for consumers…in some cases, prices could go up,” said Jacob Mandel, a senior associate at Aurora Energy Research, pointing to several ways companies can continue trading gas prices above the cap.
One such way would be for traders to switch contracts.
The EU price cap applies to front-month, three-month and front-year contracts on the Title Transfer Facility (TTF), the main Dutch gas trading hub in Europe, but companies could move towards trading gas on intraday or day Ahead gas purchase contracts that are not subject to the EU price limit.
Businesses could also move their gas trading away from energy exchanges, where the EU price cap applies, and conduct private transactions instead.
The EU cap will initially not cover these “over-the-counter” (OTC) trades, although next year the bloc will consider whether they should be included.
Most major European consumers already trade liquefied natural gas (LNG) over-the-counter, meaning they would not be affected by the EU cap, according to SEB Markets estimates.
“The price cap is purely political and today we would say that it is quite irrelevant,” said SEB analyst Ole Hvalbye.
EU energy chief Kadri Simson proposed a gas price cap last month after some 15 countries called for the measure and a handful of others resisted.
European gas prices soared to record highs of over €340 per MWh in August, the peak so far of persistently high prices caused by Russia cutting most of its gas to Europe this year.
Some analysts said the conditions that caused that spike — a slump in Russia’s gas supplies and little capacity to quickly replace them — are unlikely to repeat themselves given the rapid build-out of Europe’s LNG import infrastructure since then.
“We are less likely to see a situation where the TTF is trading at a super high premium over the LNG price. Therefore, the actual cap is also less likely to be activated,” said Sindre Knutsson, Head of Energy Markets at Rystad Energy.
A third way of avoiding the EU cap would be for traders to switch to other gas markets.
The EU price cap applies to EU hubs, but not to those outside the bloc, such as e.g. B. the British trading hub National Balancing Point (NBP).
The Intercontinental Exchange, which hosts TTF trading in Amsterdam, has also threatened to move the platform outside the EU to circumvent the cap.
It is difficult to assess whether the upper limit would have prevented price spikes this year.
The TTF prices in the front month reached the price level required to trigger the EU cap on around 40 days this year.
However, the trigger also requires prices to be €35/MWh above an LNG reference price, which is an average of different LNG price estimates.
The EU has mandated energy regulators to calculate this price, but only from February.
“With LNG infrastructure being built, it’s difficult to see another 40 days of cap,” said Ben Wetherall, market development director at ICIS.
Aurora Energy Research said that the cap’s very existence could lead to higher energy costs because by adding risk to European gas markets, it could increase the margin calls that market participants have to make to hedge trades — costs that they may pass on to consumers pass it on.
Rising energy prices have already forced European utilities and traders to seek additional funding from governments and banks to meet margin call requirements.
The EU has agreed to suspend its price cap if it has negative consequences, including a “significant increase” in margin calls.
Simone Tagliapietra, a senior fellow at think-tank Bruegel, said the only way to structurally lower Europe’s energy prices is to reduce countries’ energy demand or ease the tight supply that has pushed prices higher this year .
https://www.independent.ie/business/world/europes-gas-price-cap-can-be-skirted-by-energy-firms-and-may-not-cut-bills-say-analysts-42234452.html Europe’s gas price cap can be bypassed by energy companies and may not lower bills, analysts say
