EUROPEAN COMMISSION PROPOSED NEW TOOL TO LIMIT GAS PRICE SPIKES! WILL IT WORK!? SO FAR IT SEEMS...NOT! SHOULD WE...RE-NATIONALIZE THE ENERGY MARKETS!?
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
ON NOVEMBER 22, 2022 THE EUROPEAN COMMISSION PROPOSED NEW INSTRUMENT TO LIMIT EXCESSIVE GAS PRICE SPIKES. WILL IT WORK !? SO FAR IT SEEMS...NOT!
SHOULD WE...RE-NATIONALIZE THE OIL AND GAS MARKETS!?
MEANWHILE THE GAS AND OIL PRICES ON THE ENERGY EXCHANGE MARKETS HAVE HUGELY SPIKED YESTERDAY AND TODAY! MANY EU MEMBER STATES PUSH FOR A LOWER CAP ON THE TTF DERIVATIVE HUB GAS ON THE AMSTERDAM EXCHANGE!
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!!!
IN THE ABSENCE OF A RADICAL SOLUTION TO RE-REGULATE THE OIL, GAS AND ELECTRICITY MARKETS THE CURRENT EU LEADING POLITICAL PARTIES WILL FACE THE IMMENSE RISK OF LOOSING THE FUTURE ELECTIONS FOR THE EUROPEAN PARLIAMENT!!!
A BON ENTENDEUR, SALUT!
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Reference prices for natural gas in Europe rose sharply this morning, as a wave of low temperatures is expected to lead to increased gas demand and will demonstrate how prepared Europe is for winter in the context of reduced Russian gas supplies , reports Bloomberg, quoted by Agerpres.
At the TTF hub in Amsterdam, where reference prices are set in Europe, gas quotations even increased by 13%, reaching the highest level in the last six weeks.
Around 10:05 a.m., gas futures quotes for delivery in the next month were increasing by 6.8%, up to 156.38 euros for one Megawatt-hour.
Read the Bloomberg article here: https://www.bloomberg.com/news/articles/2022-12-01/european-gas-jumps-as-lower-temperatures-set-to-increase-demand
Read Bloomberg article here: https://www.bloomberg.com/news/articles/2022-12-02/oil-set-for-weekly-gain-as-china-eases-covid-stance-dollar-dips?leadSource=uverify%20wall
"Asian spot liquefied natural gas (LNG) prices rose for the second consecutive week on higher gas prices in Europe where a cold spell is on the horizon,"
Read full Reuters article here: https://www.reuters.com/article/global-lng/global-lng-asia-spot-prices-rise-on-increase-in-european-gas-prices-idUSL1N32S0VZ
"European Union countries will consider on Friday a proposal for a gas price cap slightly lower than a Brussels proposal that some view as too high, with a handful of countries pushing for an even lower limit, documents seen by Reuters showed."
Read full text of Reuters article here: https://www.reuters.com/business/energy/eu-countries-consider-lower-gas-price-cap-documents-2022-12-02/
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EUROPEAN COMMISSION OFFICIAL PRESS RELEASE
"Commission proposes a new EU instrument to limit excessive gas price spikes
Today (November 22, 2022) the Commission has continued its response to the ongoing energy crisis by proposing a?Market Correction Mechanism?to?protect EU businesses and households from episodes of excessively high gas prices in the EU. This complements measures to reduce gas demand and ensure security of supply through diversification of energy supplies. The new mechanism aims to reduce the volatility on European gas markets while safeguarding the security of gas supply.
Following the Russian invasion of Ukraine and weaponisation of energy supplies, natural gas prices have seen unprecedented price peaks across the EU, reaching all-time highs in the second half of August this year. The extreme price spike over almost two weeks in August was highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation. The Commission is proposing to prevent the repetition of such episodes with a temporary and well-targeted?instrument?to automatically intervene on the gas markets in case of extreme gas price hikes.?
A safety ceiling on gas prices
The proposed instrument consists of a?safety price ceiling of?€275 on the month-ahead TTF derivatives. The Title Transfer Facility (TTF), which is the EU's most commonly used gas price benchmark, plays a key role in the European wholesale gas market.?The mechanism would be?triggered?automatically?when both of the following conditions are met:
When these conditions are met, the Agency for the Cooperation of Energy Regulators (ACER) will immediately publish a?market correction notice?in the Official Journal of the European Union and inform the Commission, European Securities and Markets Authority (ESMA) and the European Central Bank (ECB). The following day, the price correction mechanism will enter into force and orders for front-month TTF derivatives exceeding the safety price ceiling will not be accepted. The mechanism can be activated as of 1 January 2023.?
Safeguards to ensure security of supply and market stability
The proposed Council Regulation contains?safeguards to avoid disruption to the energy and financial markets. To help avoid security of supply problems, the price ceiling is limited to only one futures product (TTF month-ahead products) so that market operators will still be able to meet demand requests and procure gas on the spot market and over-the-counter. To ensure gas demand does not increase, the proposal requires Member States to notify within two weeks from the activation of the Market Correction Mechanism which measures they have taken to reduce gas and electricity consumption.?Once today's proposal for a Market Correction Mechanism is adopted in Council, the Commission will also propose to declare an EU-alert under the Save Gas for a Safe Winter regulation that was adopted in July, triggering mandatory gas savings to ensure demand reduction.?In addition, there will be constant monitoring by ESMA, ECB, the Agency for the Cooperation of Energy Regulators (ACER), the Gas Coordination Group and the European Network of Transmission System Operators for Gas (ENTSO-G).
To react to possible unintended negative consequences of the price limit, the proposal foresees that?the mechanism can be suspended immediately at any time. This can happen:
There is also a possibility for the Commission to prevent the activation of the mechanism in case relevant authorities, including the ECB, warn of such risks materialising.
Background
Today's proposal builds on a wide range of actions the Commission has been taking to tackle the issue of high energy prices over the past year. In Spring 2022, it expanded its Energy Prices Toolbox from October 2021 with the?Communication on short-term?market?interventions and long-term improvements to the?electricity market design?and the?REPowerEU Plan. It also proposed new?minimum gas storage obligations?and?gas demand reduction targets?to ease the balance between supply and demand in Europe, and Member States swiftly adopted these proposals before the summer.
Prices increased further over the summer months, which were also marked by extreme weather conditions caused by climate change. In September, the Commission swiftly responded by proposing additional emergency measures to?reduce electricity demand and capture unexpected energy sector profits to distribute more revenues to citizens and industry.
On 18 October, the Commission proposed?additional measures to address high gas prices specifically and strengthen security of gas supply?via joint purchasing, default solidarity to apply in case of emergency, a new pricing reference benchmark for LNG and a temporary collar to prevent extreme spikes in derivatives markets. It also proposed the legal basis for a market correction mechanism to address exceptionally high gas prices in the short term.
Today's proposal builds upon Article 23 and 24 of the Commission's 18?October proposal. It responds to the?call from the EU Leaders on 20 and 21 October, and follows extensive consultations with the Member States. The Commission was tasked to urgently submit concrete decisions on additional measures to tackle high energy prices, including a temporary dynamic price corridor on natural gas transactions to immediately limit episodes of excessive gas prices, with the necessary safeguards. The proposal for a Market Correction Mechanism contains elements to preserve financial stability, which the Commission considers essential.?Today's proposal for a Council Regulation is based on?Article 122 of the Treaty, to be adopted by a Qualified Majority of Member States. It is designed to be in force for one year but it can be prolonged following a review due by November 2023.
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Gas prices in the EU have fallen since August thanks to demand reduction, mandatory storage filling, diversification of supplies and other measures proposed by the Commission in recent months. But we have been missing in our toolkit a way to prevent and address episodes of excessively high prices. Today, we propose to put a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes. The mechanism is carefully designed to be effective, while not jeopardising our security of supply, the functioning of EU energy markets and financial stability.
Kadri Simson, Commissioner for ?
Text source: https://ec.europa.eu/commission/presscorner/detail/en/qanda_22_7066
Qustions and Answers on the gas market correction mechanism
1. How will this measure moderate gas prices in Europe?
Since the start of Russia's aggression against Ukraine gas prices have seen increased volatility, most notably in the second half of August 2022 when prices reached unprecedented peaks on the most commonly used European price benchmark, the Dutch Title Transfer Facility (TTF). Given the role of the TTF as a reference in contracts all over Europe, the Commission is proposing a Market Correction Mechanism that will limit excessively high prices spikes on this exchange. The proposal aims to address the phenomenon of excessive price peaks caused by the TTF price benchmark becoming less representative of the evolving gas market. The ultimate goal is to protect EU businesses and consumers from price peaks that do not reflect market fundamentals and to provide more predictability to gas market players.
The proposed Market Correction Mechanism builds upon the principles and safeguards laid down in Article 23 and 24 of the Commission proposal for a?Council Regulation enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks?tabled on 18?October 2022. It is designed to act as an effective instrument against excessive gas prices and to be activated only if prices reach levels which are exceptional compared with LNG prices at other trading exchanges.?This is to avoid significant market disturbances and disruption of affordable gas supply across the EU.
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2.?How will the market correction mechanism work in practice?
In practice, the Mechanism will consist of a safety ceiling on the price of gas traded in the month-ahead TTF derivatives market, meaning that there will be a bidding limit of €275 to the orders for front-month TTF derivatives in case two cumulative conditions are fulfilled. When the mechanism is activated, orders above this limit price would not be accepted. The TTF price reference plays a key role in the European wholesale gas market, so it can be expected to have a stabilising effect when activated. The?triggering of the proposed mechanism is automatic when both of the following conditions are met. The first is that the front-month TTF derivative settlement price exceeds €275 for 2 weeks. The second, equally necessary for the activation, is that the TTF European Gas Spot Index as published by the European Energy Exchange is €58 higher than the reference price for LNG during the last 10 trading days before the end of the above-mentioned two weeks period. The reference price for LNG will be calculated based on the daily average of a basket of benchmarks, consisting of the Daily Spot Mediterranean Market, the Daily Spot Northwest Europe Market, and the daily price assessment to be produced by the Agency for the Cooperation of Energy Regulators (ACER) as envisaged in the Commission proposal for a Council Regulation of 18 October.
When ACER observes that a market correction event has occurred, meaning that both of the two above-mentioned triggering conditions are met, it will publish a market correction notice in the Official Journal of the EU, with the mechanism coming into force the day after its publication. ACER will inform the Commission, the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) of the market correction event.
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3. Why was the price ceiling established at this level?
The proposed price ceiling for triggering the Market Correction Mechanism is carefully calibrated on the basis of the TTF prices observed in 2022. Throughout most of the year, gas prices have been very high, reaching a peak during the summer. The peaks reached in the second half of August have been taken as the reference for the excessively high prices which this proposed mechanism aims to prevent.
The price level has been carefully chosen to reflect the potential impacts of its application, and is an essential element of the Commission proposal to avoid the damaging effects of excessive price spikes for citizens, businesses and for the whole European economy. The proposed level will minimise potential risks to the EU's financial stability as well as preventing a disruption of deliveries which would endanger the Union's security of supply. The level has also been chosen to ensure that the cap does not jeopardise our ability to attract LNG from the global market to Europe.
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4. What are the safeguards to ensure the EU's security of gas supply and markets functioning?
The proposed mechanism is designed in a way to guarantee the continued functioning of energy and financial markets in the EU and contains safeguards to avoid risks to the security of gas supply and financial stability.
First, the chosen level of the safety price ceiling ensures that the validity of long-term contracts is not impacted by the mechanism. Second, the instrument is targeted and it will only apply to one futures product (TTF month-ahead products). This will allow market operators facing supply requests to be able to procure gas on spot markets and over-the-counter. Third, it entails a thorough system of expert monitoring involving ACER, ESMA, the ECB, the Gas Coordination Group and the European Network of Transmission System Operators for Gas (ENTSO-G), which are tasked to constantly monitor the effects of the bidding limit on markets and security of supply. This includes an ex-ante check whereby the Commission, in case of concrete indications that a market correction event is imminent, can request an opinion from the ECB and ESMA and, where appropriate, from ENTSO-G and the Gas Coordination Group on the impact of a possible market correction event on security of supply, intra-EU flows and financial stability. This will enable the Commission to suspend the activation by ACER if need be. The opinion should take into account price developments in other relevant organised market places, notably in Asia and the US. Fourth, it aims to prevent an intended increase in energy demand by requiring Member States, in addition to the existing reporting obligations on the implementation of demand reduction, to notify to the Commission within two weeks which measures they have taken to prevent an expansion of gas and electricity consumption.?Once today's proposal for a Market Correction Mechanism is adopted in Council, the Commission will also propose to declare an EU-alert under the Save Gas for a Safe Winter regulation that was adopted in July, triggering mandatory gas savings to ensure demand reduction.
To be able to react to possible unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended at any time, either automatically or by a Commission decision.?Automatic deactivation?takes place when ACER establishes that the second activation condition (the difference between the TTF price and the LNG price reference) is no longer met for 10 consecutive trading days. ACER will without delay publish a deactivation notice in the Official Journal of the EU. A day after the publication, the bidding ceiling will cease to apply.
If unintended market disturbances or manifest risks occur, negatively affecting security of supply, intra-EU gas flows or financial stability, the Commission can issue a?suspension decision. This decision must take into account a set of criteria established in the Council Regulation, including: danger to the Union's security of gas supply, notably in case a regional or Union emergency is declared under the?EU's Gas Security of Supply rules?and in case of a possible need for rationing; an overall increase of gas consumption or failure to reach mandatory EU demand reduction targets; prevention of intra-EU flows of gas; impact on the validity of existing gas supply contracts; and impact on the stability and functioning of energy derivative markets as well as the EU's financial stability. In this case, the Commission would publish the notice in the Official Journal thereby stopping the application of the bidding ceiling as of the day after publication.
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5. When will the mechanism enter into force and how long will it apply for?
The proposed Council Regulation is a temporary and emergency measure. It will enter into force on the day following its publication in the Official Journal of the European Union and will be in force for one year. However, the market correction mechanism can only be activated as of 1 January 2023.
This proposal for a Council Regulation under?Article 122?of the Treaty on the Functioning of the European Union needs to be adopted by a Qualified Majority of Member States. This procedure allows for prompt action to protect citizens and the economy against excessively high prices and volatile markets.
The Commission will carry out a review of the Regulation by November 2023 at the latest assessing the situation of the gas supply to the EU and present a report on the main findings of that review to the Council. On that basis, the Commission may propose the extension of the validity of this Regulation.
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Questions and Answers on the gas market correction mechanism
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Text source: https://ec.europa.eu/commission/presscorner/detail/en/qanda_22_7066