The European Commission does not want to put a temporary cap on gas when it reaches prohibitive levels. The Heads of State and Government mandated Ursula von der Leyen’s team in the conclusions of the last European Council with clear instructions to intervene in a market that has proven to be full of failures in the face of a situation like the current one and a disruptive war. The instructions were clear: design a new price indicator, because the current one, the one used on the Netherlands Stock Exchange for a large part of the transactions, is not responding, as the EU believes, to the reality of the market, and is subject to manipulation by operators such as Russia. And while this new index is underway, something that could take until March,the Commission was to propose a “temporary price corridor”, a mechanism that would jump automatically at levels considered excessive. Today, the Commission has made its proposal, it has explained its mechanism, and the general reading, for some even the only possible one, is that Von der Leyen and his commissioner Kadri Simson do not want it to ever be applied.
The proposed instrument consists of a “maximum security price” of 275 euros in TTF derivatives one month in advance. The Title Transfer Facility (TTF), which is the reference price for the most widely used gas in the EU, that of the Netherlands, plays a key role in the European wholesale gas market. The Commission mechanism would be activated automatically when two conditions are met: that the settlement price of the TTF derivative of the previous month exceeds 275 euros for two consecutive weeks and that the price of the pure TTF is up to 58 euros higher than the LNG reference price for 10 days h Consecutive weak within two weeks. The LNG reference price will be calculated on the basis of the daily average of a basket of references, made up of the Daily Spot Mediterranean Market, the Daily Spot Northwest Europe Market and the daily price evaluation prepared by the Agency. for the Cooperation of Energy Regulators (ACER).
A scenario that greatly limits the options, since with these rules, in recent months, even in the worst moments, the mechanism would open activated just a few single days, as much. There is something on the table, but it clearly does not respect the spirit with which it was conceived. La Union, which has been reacting badly for a year or so and late, returns to trust everything in the hope that the winter will not be too harsh and that the worst is behind us for everyone. “The August events were similar in nature to what we anticipate addressing with the mechanism, but would not have actually triggered the fix. We have designed it to anticipate and deter similar occurrences in the future, while respecting safeguards in terms of security of supply and demand for gas”, admitted on Thursday a community spokesman after hours of silence when asked, a simple question, whether this idea would have served to alleviate August prices, which came to exceed the 350 euros. The answer is no.
The Commission’s scenario is that if this market situation were to occur, with those prices above those thresholds for half a month, ACER would publish a market correction notice in the Official Gazette of the Uni Union and report to the Commission, the European Securities and Markets Authority (ESMA) and the European Central Bank. (ECB). The following day the price correction mechanism would take effect and first-month TTF derivative orders that exceed the maximum security price could not be accepted. The mechanism, if this idea goes ahead, may be activated as of January 1, 2023, which would actually give little margin for its practical application. Its expiration date would be at the end of the course.
Too high a cap
The price level , those 275 and 58 euros, has been chosen “carefully to reflect the potential impacts of its application and is an essential element of the Commission’s proposal to avoid the detrimental effects of sudden price increases for citizens, businesses and the European economy as a whole The proposed level will minimize potential risks to the financial stability of the EU and avoid a disruption of deliveries that would jeopardize the security of the Union supply. The level has also been chosen to ensure that the cap does not jeopardize our ability to attract LNG from the global market to Europe,” the Commission says.
What the Commission does, in any case, is a proposal . This Thursday , the 27 Energy Ministers will face each other again in Brussels for a Council in which they will pronounce, debate and if there is consensus they will ratify the structure of the instrument, but being able to modify it at will. And the anger is guaranteed. The Spanish vice president, Teresa Ribera, has reacted forcefully to a proposal that she considers little more than a bad joke. “We are going to oppose forcefully , emphatically, it seems to us that for that reference (price) it is better to do absolutely nothing,” he said from the Senate. ” It seems to me that this proposal is manifestly rejectableon all sides. Neither the way in which the design of this measure has been presented, nor the maximum price, nor the application of the two conditions simultaneously seems to us to resolve anything”, Ribera has assessed. ” It does not conform to what we have asked the member states, so I calculate that (…) it will find a firm opposition from the majority of member states. I do not think it is something that can solve the current situation at all, on the contrary, it gives wings to greater speculation and a higher sales price , so we will fight against it”, has settled the minister, who for months has been increasingly critical and incisive with the community institution.
The Commission proposes but ultimately the Council decides. Parliament has no voice this time, as all these measures are being processed through the emergency clauses enshrined in the Treaties, and which leave MEPs almost completely on the sidelines.
Deactivation lock
Gas caps are being a toothache for everyone. There are countries that have put up all possible obstacles because they continue to think that this is a temporary anomaly, that the markets are correcting themselves and that intervening is more damaging than doing nothing. The energy market is extremely complicated and delicate, and today’s proposal is therefore full of nuances, clauses and precautions.
Thus, the Regulation establishes all kinds of safeguards to “avoid disturbances” in the energy and financial markets and avoid problems of security of supply. That is why the maximum price is limited in its original formulation to a single derivative so that operators can still satisfy demand requests and acquire gas in the spot market and in the over-the-counter market. To ensure that gas demand does not increase, the proposal requires Member States to notify within two weeks of the activation of the Market Correction Mechanism what measures they have taken to reduce gas and electricity consumption .
As if that were not enough, in addition to being difficult to activate, except with extreme flare-ups, the mechanism can be stopped very quickly. “Automatically, with a deactivation, when its operation is no longer justified by the natural gas market situation, that is, when the difference between the TTF price and the LNG price is no longer met during 10 consecutive working days”, says the document, or “by means of a suspension decision of the Commission when risks are identified for the security of supply of the Union, for the reduction efforts for the purpose of demand, for gas flows within the EU or for financial stability”.
The deactivation is almost more prepared than the initial activation, since in the design it is contemplated that even if market conditions justify the intervention, the Commission could prevent it if relevant institutions , including the ECB, make a convincing case for the supply risks of gouging prices and suppliers selling to other countries.
