The EU has agreed to cap gas prices, but some analysts are skeptical | Popgen Tech

The European Union on Monday wrapped up two months of heated talks on how to protect households from rising energy prices – but some analysts argue the bloc’s solution is unsustainable and may not withstand the realities of a 2023 gas supply crisis.

EU members compromised by adopting a “dynamic” cap on the price that can be offered for forward-month gas contracts on Europe’s benchmark trading facility.

The level at which the cap is activated has been lowered to 180 euros per megawatt hour, after an initial proposal of 275 euros per megawatt hour was criticized as far too high by countries including Poland, Spain and Greece.

Several conditions were inserted to allay the concerns of members such as Germany, which argued that the scheme could lead to gas shortages next year. These clauses lead to an automatic suspension of the cap and include the dynamic bid rate falling below 180 euros per megawatt hour for three consecutive working days, or the European Commission declaring a state of emergency.

The limit of 180 euros per megawatt must be exceeded for three working days on Europe’s Dutch Title Transfer Facility (TTF), and it must be 35 euros per megawatt above the global reference price for liquefied natural gas over the same period.

Germany eventually voted in favor of the so-called “market correction mechanism”, but the Netherlands and Austria abstained.

Austria’s climate action ministry said in a statement on Tuesday that while it is “confident that the market correction mechanism can play an important role in avoiding extreme increases in European gas prices, the last-minute extension of the mechanism to more gas hubs than the TTF does. make some concerns.”

The ministry noted that “there are certain risks that the necessary safeguards are undermined by this expansion.” Austria is dependent on Russian gas.

Dutch Energy Minister Rob Jetten said the mechanism remains “unsafe” despite the latest improvements. He flagged that it could disrupt the European energy market, jeopardize security of supply and have wider financial implications.

“From its inception, we have been very clear about this mechanism: it does not solve the core problem,” he said, adding that the Netherlands’ concerns were shared by the European Central Bank and by ICE (Intercontinental Exchange), the operator of the most important natural gas market in Europe.

The ECB said earlier this month that “the current design of the proposed market correction mechanism could in some circumstances jeopardize financial stability in the euro area.” It declined to provide further comment to CNBC after the EU announcement.

ICE said in a statement that it has “consistently expressed concern” about the destabilizing impact of a price cap. It added that it will now review the details of the EU announcement to see if it “can continue to operate fair and orderly markets for TTF from the Netherlands according to our European regulatory obligations.”

The EU argued the mechanism would be regularly monitored and could be stopped if financial stressors or supply challenges were raised, in response to concerns flagged by the ECB.

Analysts told CNBC that these conditions call into question the ability of the mechanism to limit energy price increases.

“This reflects the challenge between strong rhetoric and the realities of supply security,” Nathan Piper, head of oil and gas research at Investec, said by phone. “It’s a cap, but allow them to operate above the cap if they really need the gas. The fact on the ground is, if you need the gas, you’ll pay any price, which is what in Europe 2022 did.”

Piper listed two possible areas of additional upcoming demand: China and Europe. This month, Beijing suddenly relaxed the zero-Covid policy it had followed this year. Europe, meanwhile, has managed to nearly fill its gas supplies for this winter by continuing to import Russian gas supplies – but plans to phase out this intake along with imports of seaborne oil products in 2023.

Europe and Asia remain net importers of oil and gas, Piper continued, meaning intense competition for spot cargoes is ahead. About 70% of liquefied natural gas (LNG) is tied up in long-term contracts, leaving 30% available on a spot basis.

In an interview with Reuters on Tuesday, Norway’s Prime Minister Jonas Gahr Støre said he did not expect more Norwegian LNG to be exported outside Europe as a result of the new EU measure.

But Piper said: “There is no motivation for spot LNG carriers [other] as the highest price. So volumes may rise elsewhere, and [European] security would be compromised.”

Janko Lukac, senior analyst at Moody’s Investors Service, echoed this sentiment to CNBC: “The effectiveness of a unilateral cap on purchase prices from the EU is highly uncertain.”

“LNG markets globally and structurally will be short[-supplied] for the next few years. So if an international buyer is willing to pay a higher price, Europe runs the risk of the respective volumes going to another buyer,” he said.

Energy Minister Rob Jetten said it was more important for the EU to focus on its electricity savings targets, on joint gas purchase agreements and on issuing faster permits for renewable energy schemes.

Ending energy dependence was the key reason Pavel Molchanov, managing director for renewable energy at wealth management firm Raymond James, said the mechanism was a “stop-gap measure.”

“The solution for Europe will be to diversify its energy mix completely away from fossil fuels,” Molchanov told CNBC’s “Squawk Box Asia” on Tuesday.

“As it stands, about 20% of Europe’s electricity comes from natural gas, 10% comes from coal. Both of these commodities have increased dramatically as a result of the war, and the Kremlin’s weaponization of energy exports.”

Energy transition solutions – such as wind, solar and green hydrogen, as well as increasing energy efficiency and removing coal from the electricity mix – could be put on an accelerated timetable within five years to rid Europe of natural gas problems, he said.

EU ministers in favor of the mechanism were optimistic about its impact.

European Energy Commissioner Kadri Simson said the initiative would “take away the war premium, the markup compared to global LNG prices, that Europe pays” due to prices on the Dutch TTF.

Tinne Van der Straeten, Belgium’s energy minister, said the move would ensure security of supply while protecting citizens and the economy from higher prices.

Investec’s Nathan Piper also said there were strong reasons why Europe should lower gas prices beyond the pressure on households.

“Very high gas prices for several years will have a major impact on the competitiveness of [the] European industry. The US gas price is a fraction of Europe’s because they are self-sufficient, so industry can move to where input costs are lower,” he said. “That means a long-term risk for Europe and the UK if energy costs can’t come off.”