The pipelines run along the technical installation for compressing natural gas at the Rehden natural gas storage facility of astora GmbH, the largest natural gas storage facility in Western Europe.
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The European Union ended two months of heated talks on Monday over how to protect households from rising energy prices – but some analysts say the unit’s solution is unsustainable and may not withstand the realities of the 2023 gas supply crisis.
EU members compromised by adopting a “dynamic” cap on the price that can be bid on gas contracts in the first month on the European trading benchmark.
The level at which the cap kicks in has been lowered to €180 per megawatt hour, after an initial proposal of €275 per megawatt hour was criticized as too high by countries including Poland, Spain and Greece.
The limit of €180 must be exceeded for three working days in the Dutch Title Transfer (TTF) system and must be €35 per megawatt above the global liquefied natural gas reference price over the same period.
Several conditions were put in place to allay concerns from members, such as Germany, who argued that the scheme could cause gas shortages next year. These clauses result in an automatic suspension of the limit and include a drop in the dynamic bidding rate below €180 per megawatt hour for three consecutive working days or the declaration of a state of emergency by the European Commission.
Germany finally voted for the so-called “market correction mechanism”, but the Netherlands and Austria abstained.
Austria’s climate action ministry said in a Tuesday statement that while “it is certain that the market adjustment mechanism can play an important role in avoiding extreme gas price spikes in Europe, a last-minute extension of the mechanism to more gas hubs than does TTF to raise some concerns.”
The ministry noted that “there is some risk that this extension will undermine essential safeguards.” Austria is dependent on Russian gas.
Rob Jetten, the Dutch energy minister, said the mechanism remained “dangerous” despite recent improvements. He noted that this could disrupt the European energy market, threaten security of supply and have wider financial implications.
“We have been very clear about this mechanism from the beginning: it does not solve the fundamental problem,” he said, adding that the concerns of the Netherlands are shared by the European Central Bank and the ICE (Intercontinental Exchange)., operator of the key natural gas market in Europe.
The ECB earlier this month said that “the current design of the proposed market adjustment mechanism may under certain circumstances threaten financial stability in the euro area.” He declined to comment further on CNBC following the EU announcement.
ICE said in a statement that it had “consistently expressed concerns” about the destabilizing impact of the price cap. It added that it would now review the details of the EU announcement to see if it “can continue to operate in fair and orderly markets for TTF from the Netherlands in line with our European regulatory obligations.”
Easy to tip over?
The EU argued that the mechanism would be monitored regularly and could be stopped if financial stressors or supply challenges arise, in response to concerns raised by the ECB.
Analysts told CNBC that these conditions call into question the mechanism’s ability to contain energy price increases.
“This reflects the challenge between strong rhetoric and the realities of security of supply,” Nathan Piper, head of oil and gas research at Investec, said over the phone. “It’s a cap, but it allows them to run above the cap if they really need gas. The fact is that if you need gas, you will pay any price, just like Europe did in 2022.”
Piper listed two possible areas of additional upcoming demand: China and Europe. Beijing this month abruptly eased the zero Covid policy he had in place this year. In the meantime, Europe has managed to almost fill up its gas supplies for this winter by continuing to import Russian gas supplies – but plans to drastically reduce that consumption in 2023.
Europe and Asia remain net importers of oil and gas, Piper continued, which means there will be fierce competition for spot cargo. About 70% of liquefied natural gas (LNG) is tied to long-term contracts, leaving 30% available on site.
In an interview with Reuters on Tuesday, Norwegian 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 incentive for spot LNG carriers [other] than the highest price. So volumes can increase elsewhere and [European] would be a safety hazard.”
Janko Lukac, a senior analyst at Moody’s Investors Service, echoed this phrase to CNBC: “The effectiveness of a unilateral purchase price cap from the EU is highly uncertain.”
“Global and structural LNG markets will be short over the next few years. Therefore, if an international buyer is willing to pay a higher price, Europe runs the risk that the corresponding quantities will go to another buyer,’ he said.
Long-term measures
Energy Minister Rob Jetten said it was more important for the EU to focus on its electricity saving targets, joint gas purchase agreements and faster permitting of renewable energy systems.
Ending energy reliance was the main reason why Pavel Molchanov, managing director of renewable energy at wealth management company Raymond James, said the mechanism was a “precautionary 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.
“Currently, around 20% of Europe’s electricity comes from natural gas, 10% from coal. Both of these commodities have increased dramatically as a result of the war and the Kremlin’s arming of energy exports.”
He said energy transition solutions – such as wind, solar and green hydrogen, as well as increasing energy efficiency and removing coal from the energy mix – could be accelerated to rid Europe of gas companies within five years.
End of War Bonus
EU ministers in favor of the mechanism were optimistic about its impact.
Kadri Simson, European Commissioner for Energy, he said the initiative would “take away the war premium, the markup compared to world LNG prices that Europe is paying” because of the Dutch TTF’s pricing.
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.
Nathan Piper of Investec also said there are strong reasons why Europe needs to cut gas prices beyond the burden on households.
“Very high gas prices will have a major impact on the competitiveness of European industry for many years to come. The gas price in the US is a fraction of the gas price in Europe because they are self-sufficient, so the industry could move to where production costs are lower,” he said. “This means a long-term risk for Europe and the UK if energy costs cannot come down.”