Changes to a proposed gas price cap should assuage concerns exports will be diverted, EU officials believe.
Germany looks like accepting European Commission tweaks to a proposed gas price cap to ease concerns that it might cause LNG exporters to divert cargoes to Asia in search of higher prices, with an agreement on the mechanism likely by the end of the year, EU sources told MNI.
Officials believe that the high EUR275 MW/h price cap proposal on TTF month-ahead contracts, as well as a EUR58 maximum spread between TTF spot and LNG prices should be enough to persuade Germany to back the new Market Corrective Mechanism. Current spot prices are around EUR118.393.
The proposed mechanism would be in place for a year and would be activated if prices rise to these two thresholds but can be deactivated once prices fall back.
EU energy ministers meet tomorrow to discuss a new package of energy measures, although one senior EU official said the Czech Presidency was unlikely to push for a decision on the price cap at the meeting, but would instead explore different countries’ views on the proposal.
In addition to price tweaks to the cap plan, sources said that pushing out the mechanism’s proposed start to Jan 1 would allow EU leaders to thrash out a deal at their Dec 15-16 summit even if ministers fail to agree on it this week.
Until now Germany has opposed the MCM. While the country has succeeded in filling its gas storage capacity ahead of the European winter, German officials have been concerned that a long queue of LNG tankers waiting outside northern EU ports pending a possible further rise in European prices might seek Asian customers instead if the cap is introduced, especially if China starts to eases Covid restrictions on its economy.
“Germany wants a backup even though its storage is full in case there is a cold weather snap for instance,” one informed source said.
LNG EXPORTS DIVERTED
Such fears have been substantiated by the Spanish and Portuguese price cap, which prompted LNG suppliers to switch exports to France.
Sources agreed that the price cap and the spread vs LNG proposed by the Commission is relatively high by historical standards, but said that they politically need to show they are acting.
“Leaders want to give some signal that they are fighting to limit prices and avoid the kind of volatility we saw in August,” one said.
European natural gas prices reached levels 1000% higher than the previous average in August this year. Month-ahead prices spiked well above EUR200/MWh and reached a peak of almost EUR314/MWh on Aug 26, the Commission noted in its proposal.
The cap will not apply to OTC markets, because of monitoring difficulties, or to spot markets because of security of supply worries, a concern which is shared by a number of EU countries.
One source noted that EU states are split into different camps on the topic. The Netherlands is concerned about the cap’s impact on security of supply, other countries worry a price ceiling will push trading off-exchange while Poland and others prefer a “Dynamic Price Corridor” which would allow room for prices to move up or down within a corridor which tracks market trends.
Russia has already retaliated against the cap proposal by warning that it may further limit the gas it still exports to Hungary and Austria via Ukraine.