THE COUNCIL OF EUROPEAN UNION AGREES ON TEMPORARY MECHANISM TO LIMIT EXCESSIVE GAS PRICES! THE RETHORICAL QUESTION IS: WILL IT WORK AND BE EFFECTIVE!?
George Florin Staicu
Speaker, EBRD PFI Relationship Manager, Coordinating Lead Author UNEP Global Environment Outlook; Global Ambassador of Sustainability; member of International Finance Corporation's GLC Directory of Training Professionals
COUNCIL OF EUROPEAN UNION AGREES ON TEMPORARY MECHANISM - A CAP OF 180€/MWH TO LIMIT EXCESSIVE GAS PRICES!! THE RETHORICAL QUESTION REMAINS THE SAME: WILL IT WORK AND BE EFFECTIVE!?
European Union energy ministers on Monday agreed a gas price cap, after weeks of talks on the emergency measure that has split opinion across the bloc as it seeks to tame the energy crisis.
The cap is the 27-country EU's latest attempt to lower gas prices that have pushed energy bills higher and driven record-high inflation this year after Russia cut off most of its gas deliveries to Europe.
Ministers agreed to trigger a cap if prices exceed 180 euros ($191.11) per megawatt hour for three days on the Dutch Title Transfer Facility (TTF) gas hub's front-month contract, which serves as the European benchmark.
The deal follows months of debate?on the idea and two previous emergency meetings that failed to clinch an agreement among EU countries that disagreed on whether a price cap would help or hinder Europe's attempts to contain the energy crisis.
Roughly 15 countries, including Belgium, Greece and Poland, had demanded a cap below 200 euros/MWh - far lower than the 275 euros/MWh trigger limit originally proposed by the European Commission last month.
IN MY OPINION THE RESPECTIVE CAP OF 180€/MWH MAY BE "BLOWING IN THE WIND" AS IT IS ACTUALLY INVITING GAS COMPANIES TO ARTIFICIALLY AND UNSCRUPULOUSLY INCREASE GAS PRICES AS THE 180€/MWH CAP REPRESENTS A 600% INCREASE COMPARED TO THE 30€/MWH GAS PRICE AVERAGE OF THE PREVIOUS YEARS!!
Since the TTF Amsterdam exchange (bourse) gas price is utilized as a reference by other European energy exchanges, this means the respective 600% gas price increase / profit margin will also be reflected in the high prices of the electricity.
In fact, this "mechanism" is "reducing" the gas and electricity profit margin from 1000% (one thousand percent) to "just" 600% (six hundred percent) ????!!!!
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I repeat what I wrote on my LinkedIn post dated December 2, 2022 (https://www.dhirubhai.net/pulse/european-commission-proposed-new-eu-instrument-limit-excessive/ ):
"...These abnormal, irrational surges of oil and gas prices on the energy markets although the gas deposits storages are filled 98% (!!!) demonstrate once more what I repeatedly said in the past year that these commodities are?not compatible neither with the energy markets liberalization nor with the market economy law of supply and demand.
The deregulation / liberalization of the energy markets wss supposed to generate a significant decrease of the oil and gas prices both for the private / public economic sector and for the population.
Gas retail liberalization was meant to open up the market, which used to be monopolized by city gas utility companies, to not only other energy companies but also to business operators in other industries or regions. It was supposed to lead to increased price competition and the suppression of gas prices volatility at skyrocketing levels fueling the devastating inflation.
The reality showed and continues to show that the liberalization of the European Union oil and gas markets HAS TOTALLY FAILED as it did not lead to an increased competition and, implicitly, to a decrease of energy prices. And the MAIN CULPRIT for the "legalized" abuses on the energy markets is represented by the speculative derivative transactions on the Amsterdam TTF gas hub undertaken by greedy traders.
The solution is simple:
1. We have a COST OF EXTRACTING the oil and gas!
2. We have a COST OF PROCESSING, TRANSPORT AND DISTRIBUTION of the oil and gas!
3. We have the demented spread added by the derivative traders on their oil and gas SPECULATIVE TRANSACTIONS that generate a TOTALLY ABNORMAL, ARTIFICIAL, HUGE INCREASE of the oil and gas prices on the energy commodity exchanges/bourse that generates devastating inflation and catastrophic consequences on the private / public economic sectors and on the standard of living of the EU population!
While the cost of producing, transporting and distributing the electricity and the cost extracting, processing, transport and distribution of oil and gas ARE MORE OR LESS THE SAME AS THEIR LEVELS IN THE PREVIOUS PRE-PANDEMIC YEARS,?we need to FIND THE SOLUTION TO ELIMINATE THE CAUSE i.e. THE SPECULATIVE DERIVATIVE TRANSACTIONS ON THE AMSTERDAM TTF GAS HUB EXCHANGE/BOURSE!!
MAYBE THE ONLY REASONABLE SOLUTION WOULD BE TO..RE-REGULATE / NATIONALIZE THE OIL, GAS AND ELECTRICITY MARKETS IN THE EUROPEAN UNION!
CURRENTLY, EVERYTHING IN A SOCIETY HAVILY DEPENDS ON THE ENERGY OF OIL, GAS AND ELECTRICITY COMMODITIES: ECONOMY, NATIONAL DEFENSE, NATIONAL SECURITY, AGRICULTURE, FARMING, FOOD, HEALTH, EDUCATION, CULTURE, JUDICIAL, POLICE SYSTEMS ETC!!
Until the alternative, clean, renewable energy sources will reach a high significant level,?the?European Commission ?and the?European Parliament ?must consider the OIL, GAS and ELECTRICITY as COMMODITIES OF VITAL STRATEGIC IMPORTANCE BOTH FOR THE SECURITY AND INDEPENDENCE OF THE EUROPEAN UNION AND THE SECURITY AND INDEPENDENCE OF EACH EU MEMBER STATE!!!..."
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BELOW YOU CAN SEE THE OFFICIAL PRESS RELEASE
Council agrees on temporary mechanism to limit excessive gas prices
EU energy ministers reached a political agreement on a Council regulation that sets a market correction mechanism to protect citizens and the economy against excessively high prices. The regulation aims to limit episodes of excessive gas prices in the EU that do not reflect world market prices, while ensuring security of energy supply and the stability of financial markets.
We have succeeded in finding an important agreement that will shield citizens from skyrocketing energy prices. We will set a realistic and effective mechanism, which includes the necessary safeguards that will steer us clear from risks to security of supply and financial markets stability. Once again, we have proved that the EU is united and will not let anybody use energy as a weapon.
Jozef SíKELA, Czech minister of industry and trade
See full infographic here:
Why is a market correction mechanism needed??
August 2022 saw an?unprecedented peak in EU gas prices?– up by 1000% (!!!!!) compared to prices in previous decades.??
Over the last ten years, the average price of gas was between €5/MWh (!!!!) and €35/MWh (!!!!).
In August?2022, TTF month-ahead and day-ahead prices hit an?all-time high of over €300/MWh. The highest price levels were reached over five consecutive trading days from?22 to 26?August 2022, when they were above €265/MWh.??
Activation and deactivation
The market correction mechanism will be?automatically activated?if the following 'market correction event' occurs:
- The month-ahead price on the Title Transfer Facility (TTF) exceeds?180€/MWh for?three working days;
and
- The month-ahead TTF price is?35€ higher?than a reference price for LNG on global markets?for the?same?three working days.
The mechanism will apply as of 15 February 2023. The Agency for the Cooperation of Energy Regulators (ACER) will constantly monitor the markets and if it observes that a market correction event has occurred, it will publish a 'market correction notice' on its website.
While the mechanism is active,?transactions concerning the natural gas futures that are within the scope of the MCM above?a so-called?'dynamic bidding limit' will not be allowed to take place. The ‘dynamic bidding limit’ is the reference price for LNG on global markets (based on an international basket of LNG transaction hubs) plus 35€/MWh. If the reference price for LNG is below 145€, the dynamic bidding limit will remain at the sum of 145€ and 35€.
Once activated, the dynamic bidding limit will?apply for at least 20 working days. If the dynamic bidding limit is?below 180€/MWh for last three?consecutive working days, it will be?automatically deactivated.
The dynamic bidding limit will?also be automatically deactivated, at any time, if a regional or a Union emergency?is declared by the European Commission according to the security of supply regulation, notably in a situation where the gas supply is insufficient to meet the gas demand (‘rationing’).
In both cases, ACER will publish a 'deactivation note' on its website.
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Suspension mechanism
The regulation includes a?suspension mechanism, if risks to security of energy supply, financial stability, intra-EU flows of gas, or risks of increased gas demand are identified.
The Commission, ESMA and ACER will constantly monitor and review the functioning of the market correction mechanism from the day of entry into force of the regulation on 1 February 2023. At any time, when such risks or market disturbances materialise, the?Commission will adopt an implementing decision to suspend?the market correction mechanism.
The market correction mechanism will be suspended, notably if gas demand increases by 15% in a month or 10% in two months, LNG imports decrease significantly, or traded volume on the TTF drops significantly compared to the same period a year ago.
The suspension decision will be published in the EU's Official Journal and enter into force on the next day.
Scope
The regulation introduces a market correction mechanism on virtual gas trading platforms in the EU.
Member states agreed that the mechanism will apply to?month-ahead, three months-ahead and a year-ahead derivative contracts. This refers to the time during which the contract can be purchased at a certain price before it expires. The ceiling will not apply to over-the-counter (OTC) trades (where participants trade directly between two parties, without being listed on an exchange), day-ahead exchanges and intra-day exchanges.
By 23 January 2023, ESMA and ACER will publish a preliminary data report concerning the introduction of the market correction mechanism. ESMA and ACER will assess the effects of the market correction mechanism on financial and energy markets and on security of supply, to verify whether the key elements and the scope of the market correction mechanism are still appropriate in the light of financial and energy market and security of supply developments, and submit reports to the Commission by 1 March 2023. The Commission shall then propose amendments to exclude hubs other than the TTF from the regulation in case their inclusion has negative effects on the functioning of the mechanism, no later than 31 March 2023.
By 1 November 2023, the Commission will carry out a review of the regulation in view of the general situation of the gas supply and based on that report, it may propose to extend its validity.
The text will be made available later.
Background and next steps
The regulation will now be formally adopted by the Council by written procedure and published in the EU Official Journal.
The regulation will enter into force on 15 February 2023. The regulation is temporary and will apply for one year.
The Commission presented a proposal for a Council regulation on 22 November 2022 under article 122 of the Treaty on the functioning of the EU, designed for emergency situations.
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Last reviewed on 19/12/2022
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George Florin Staicu
Global Sustainability Ambassador; member of the International Finance Corporation - Grow Learn Connect Directory of Training Professionals; USAID banking scholarship recipient; member of Green Forum; member of the Professional Risk Managers' International Association;
Independent banking, microfinance, SME lending, ESG, UN SDGs, EU Green Deal, nature-based infrastructure solutions, circular economy, green - blue inclusive sustainable development & finance, EU Corporate Sustainability Reporting Directive (CSRD), IFRS-ISSB, UNEP TCFD & PRB,?EFRAG, CDP, GRI &ISO reporting standards, blended finance, Fintech & Ecotech promoter, Public-Private Partnership promoter, gender equality, social performance, learning & development, strategic planning, risk management, team leader, senior project manager, consultant, trainer and business coach
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