EU Gas Cap Deal No Closer Ahead of Council Meeting

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EU member states are no closer to reaching an agreement on capping wholesale gas prices ahead of next week’s European Council meeting, sources told Energy Intelligence on Friday.

The Netherlands and Czech Republic have this week pitched fresh proposals in a bid to end months of political deadlock over capping gas prices, however the various proposals could cause more headaches than provide a solution at the Dec. 13 meeting.

Balancing Proposals

The Dutch government, which has opposed capping gas prices, on Monday proposed price caps for government-owned or state-supported gas buyers.

The proposal, seen by Energy Intelligence, suggests the record gas prices Europe experienced in August was due to government-backed companies buying gas to fill storage sites ahead of winter.

The “dynamic low price cap” would prevent government-backed buyers from bidding too much for gas, the Dutch government suggests.

“It could apply to both the buying and (future) selling transactions of these parties and therefore could include their purchases and sales at the spot/(Dutch benchmark) TTF month ahead/(over the counter) OTC or other markets,” according to the document.

The document did not disclose at what price the cap would be triggered, however it does state that the cap would be reviewed each month.

A day after the Dutch pitched their alternative cap plan, the Czech Republic, holding the EU presidency, unveiled a plan to cap prices if they exceed €220/MWh ($67/MMBtu) for five days on the front-month TTF contract, and exceed an international LNG reference price by at least €35 for five consecutive days.

In comparison, the European Commission's price cap proposal in November, deemed by market players as a largely symbolic measure, would cap prices if the TTF front-month contract remained above €275/MWh for two weeks and exceeded a global LNG reference price of €58 for 10 consecutive days.

The Czech government’s proposal was discussed by EU diplomats on Wednesday, however sources told Energy Intelligence that no agreement has been reached.

“There are two opposing camps. The current proposal is still not enough for the pro-camp. The opposing camp has suggestions to improve the current proposal but I think that it’s rather a 'gesture of constructivity' than a real change of hearts. I expect a heated debate on Tuesday,” one Central European diplomat told Energy Intelligence.

One European diplomat in favor of a strong price cap told Energy Intelligence that there is “no final agreement yet.” Asked whether an agreement is closer compared to two weeks ago, the source said: “I hope so. But will not be sure till Dec. 13.”

Commercial Opposition

In the run-up to the council meeting on Tuesday, the Intercontinental Exchange (ICE), host of TTF trading, and the European Central Bank (ECB) both warned capping gas prices could, in fact, drive prices higher and in turn risk financial stability.

In a memo sent to the European Commission, ICE warns that a cap will impact the flow of liquidity to utilities and energy firms to enable them to hedge exposure to future gas prices. These firms will likely turn to uncapped OTC markets, which tend to be more expensive and volatile, according to the exchange operator.

“Greater reliance on OTC markets for gas trading leads to higher risks that counterparties default and energy firms require government support,” the memo, seen by Energy Intelligence, states.

The ECB published a formal opinion on Thursday, warning that the commission’s market correction mechanism in its current form risks “financial stability in the euro area.”

"The mechanism's current design may increase volatility and related margin calls, challenge central counterparties' ability to manage financial risks, and may also incentivize migration from trading venues to the non-centrally cleared over-the-counter market.”

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