After many weeks of delay, Brussels has finally presented its legislative proposal to impose a cap on the price of imported gas in order to cushion the impact of the energy crisis, as required by countries such as Italy, France or Spain. Specifically, the Commission Ursula von der Leyen proposes setting the limit at 275 per megawatt hour (MWh). In other words, a very high level that has only been reached during the worst days of the second half of August 2022.
The price of gas shot up an all-time high of almost 320 euros/MWh on August 26 in the main European market (the Dutch TTF), but just two days later it had dropped to 230 euros. As of today, the price is around 116 euros/MWh and futures markets place it at 125 euros/MWh on average in 2023.
The Community Executive justifies that the ceiling that it proposes is so high with the argument that their goal is not to artificially undercut prices (something he considers impossible in a world market). What it is about is having an instrument of last resort to cope with episodes of extreme volatility and excessive spikesalleges.
[Alemania y Holanda se abren a aprobar el tope al precio del gas que propone Bruselas]
The cap on imported gas will be automatically activated when the defined thresholds are exceeded. But at the same time, the system includes multiple safeguards and emergency brakes to suspend it in case of supply problems, as claimed Germany and Holland.
This so-called ‘market correction mechanism’ will apply in the Dutch TTF, to which most contracts in the EU are indexed. Transactions at a higher price will not be able to be executed.
is excluded the spot trade (OTC), in which individual bilateral contracts are negotiated and signed outside of any market. Not only because of the difficulty of controlling it, but also because it constitutes an “escape valve” for security of supply.
For this mechanism to be activated, the two conditions simultaneously: that the limit of 275 euros per MWh is exceeded (for two weeks) and that prices in Europe are 58 euros on average higher than those of the international market for liquefied natural gas (for 10 days). The Agency for the Cooperation of Energy Regulators (ACER) will be responsible for verifying that the conditions are met and notifying the activation.
Deactivation will also be automatic when either of the two conditions is no longer met. But in addition, the mechanism foresees an emergency brake that will allow Brussels to suspend it immediately if there are supply problemsan excessive increase in gas demand, turmoil in the derivatives markets or conflicts with long-term contracts.
As requested by Berlin and The Hague, The Community Executive has also incorporated a series of safeguards prior to the activation of the cap on gas. When ACER finds that the thresholds are being touched, it must consult with all the affected actors, including the European Central Bank, the European Securities and Markets Authority or the gas coordination group.
The plan will be discussed at the extraordinary meeting of energy ministers called for November 24 in Brussels, although a second meeting will probably be needed in early December. If energy ministers are unable to close a deal sooner, The cap on gas could be on the menu for the European leaders’ summit on December 15 and 16.
The Commissioner for Energy, Kadri Simson, has been convinced that her compromise proposal will serve to achieve a solution of synthesis between the two opposing sides: Spain, Italy and France on the one hand, and Germany and the Netherlands on the other. If approved, the gas price cap would take effect on January 1, 2023 and, as it is an emergency measure, it will have a limited duration of 12 months.
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Source: Elespanol
