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EU market intervention risks supply crunch – think tank

20 Oct 2022 14:14



20 Oct 2022 14:14

(Montel) EU leaders should commit to gas demand cuts as interfering with wholesale gas prices would create “significant risk” of supply shortages, said think tank Epico ahead of a key meeting in Brussels on Thursday.

Options such as gas price caps, a new LNG price index, joint buying and directly subsidising end-users all included one or more political, financial or supply security risks, according to analysis by the Berlin-based energy and climate think tank. 

All short-term options to intervene directly in wholesale gas prices would create difficult allocation decisions given the lack of price signals, said Epico. 

All options to lower prices also risked increasing gas demand, adding to the risk of shortages and undermining the price softening effects.

Epico therefore recommended that the EU trigger an “emergency alert” so its voluntary goal to save 15% of gas this winter – around 45bcm – became binding and to regularly review if more stringent cuts were needed. 

EU leaders are due to discuss the European Commission’s latest emergency energy proposals today, including measures for a new LNG price index, a possible cap on Dutch TTF gas hub prices as a last resort, and rules for organising joint gas buying to fill storage units for next winter. 

An LNG price index could be set up relatively quickly, said Epico, but there was no guarantee when or if the market would start using it. It added that such an index could end up converging with the Dutch TTF hub as buyers bid up prices to attract gas to the northwestern European grid. 

The EC said it wanted to create “a quality [LNG index] product” based on real transaction data to encourage voluntary take up. There has been no suggestion yet that using it would be obligatory. 

Epico said joint gas buying, particularly for filling storage before next winter, may be a feasible option. It would be administratively difficult to set up and risked breaching long-term contracts, however. 

The EC has proposed requiring national governments to ensure that at least 15% of their storage filling obligation volumes – about 13.5bcm – are put to tender as pooled demand via an EU energy platform. The companies involved would not be obliged to buy any gas offered through this process. 

Gas price cap

EU leaders may provide guidance after their meeting on whether the EC should propose a price cap on gas used for power generation, an option currently used in Portugal and Spain. 
Epico said such a cap would likely increase power exports to non-EU countries such as the UK and Norway and could make gas power plants cheaper than coal, which would increase gas demand in Germany. 

It could also increase gas demand for power generation generally, thus diverting limited supplies away from other sectors. 

“This may be a good measure for countries that can import more gas, like Spain but could exacerbate the scarcity issue in markets that cannot, such as Germany or the Netherlands,” said Epico. 

European gas and power prices have soared this year as tensions over the war in Ukraine caused Russian gas pipeline supplies to drop dramatically. 

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