Radical Plans Put EU Gas on Dubious Path

The EU's unprecedented intervention in its gas and power sectors looks set to radically alter the design of both markets in coming years. But energy executives at this week's Gastech conference in Milan were struggling to anticipate the profound impact of proposed EU reforms. Amid no signs of Russia’s Gazprom restarting gas flows via the Nord Stream 1 pipeline — and fears among Gastech delegates that piped flows via Ukraine may also be cut this winter — the European Commission will discuss this week five key measures that seek to cut electricity demand and provide liquidity support to energy companies while considering a range of caps on oil and gas company revenues, a Russian gas price cap and a similar cap on LNG imports. These potentially deep structural changes could fundamentally reshape Europe's energy landscape, with possible ramifications around the world in increasingly globalized gas markets. Norway, Europe’s biggest gas supplier, says it is open to discussing voluntary gas price caps with its European buyers. “I am not closing the door to any ideas that can take Europe forward,” Norwegian Prime Minister Jonas Gahr Store told the Financial Times as the commission is set to recommend member states adopt an emergency wholesale price cap for gas. The front-month October futures contract on the Dutch TTF hub soared over €60 early this week to over €280 per megawatt hour ($81.75 per million Btu) as the market digested the Nord Stream shutdown before settling around €240/MWh.

Political momentum is building behind the gas price cap as European states look ahead to a winter of discontent. Italy is pushing hard for it with German support amid a raft of recent state interventions, which have seen both Finland and Sweden offer €10 billion ($10 billion) and €23.4 billion, respectively, in liquidity guarantees to their power companies on Sep. 4, Austria providing a €2 billion credit line, and Germany considering an energy windfall tax to fund a €65 billion fund to help consumers and industry. A series of commission draft proposals obtained by Energy Intelligence have shown a range of options emerge on price caps. These include a temporary price cap for gas used in electricity generation, a temporary price cap on gas imported from Russia, the creation of administrative gas pricing zones within the EU for the most impacted countries, a single entity buyer of Russian gas, or a possible temporary exclusion of gas from the merit order in power markets.

Potential caps provoked deep unease among Gastech delegates, which included executives from oil majors, national oil companies and trading firms. A key risk, many say, is that any temporary cap might prompt gas producers to decline to bid in the European market, while LNG suppliers could simply seek out higher prices in Asia. In winter 2023-24, Europe could find it much harder to meet its gas storage targets with less gas available. And excluding gas from price setting in the power market may incentivize gas-fired power generation — the opposite of what the EU wants to achieve on cutting gas demand by 15% between August 2022 and March 2023. A case study of what might happen can already be seen in Portugal and Spain, where a cap on gas prices was set for electricity generation, lowering power prices where gas is the dominant price-setting fuel. While Spain’s average spot power prices in June and July were €169.73/MWh and €143.23/MWh respectively, operator Omie data shows, Northwest European power prices were soaring. But this led to higher demand — Spain’s share of gas-fired power generation was up almost 15% in June from May and was up another 4% in July.

On the storage and supply side, Commission President Ursula von der Leyen has pointed to the success of filling European gas storage ahead of schedule, reaching 82% of capacity before the 80% goal in October. But industry executives like RWE supply and trading CEO Andree Stracke warned against any early backslapping ahead of a rebound in Chinese demand. “Next winter is a different ballgame,” he insisted. “The question is how much gas is coming in the meantime and how [many] more LNG terminals will be available next winter.” Indeed, maintaining the REPowerEU target of replacing 155 billion cubic meters of Russian gas entirely by 2030 remains a challenge. In this context, it is interesting that only one major long-term LNG deal — between Germany’s Uniper and Australia’s Woodside — has been signed at Gastech so far this week. Under the deal, Woodside will supply 1 Bcm/yr to Europe, with shipments starting from January 2023 and potentially running until 2039.

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